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On Thursday, Imperial Brands (IMB:LN) (OTC: OTC:IMBBY) received an upgrade in its stock rating by Morgan Stanley from Equalweight to Overweight, accompanied by an increase in the price target to GBP23.00, up from GBP20.00. The adjustment reflects the firm's outlook on the tobacco company's financial strategies and market position compared to its competitor, British American Tobacco (NYSE:BTI) (BAT (LON:BATS)).
The analyst from Morgan Stanley anticipates that Imperial Brands will repurchase approximately 25% of its market capitalization over the next three years. This is a significant move compared to the estimated 5% at British American Tobacco. The predicted buyback is underpinned by Imperial Brands' lower leverage and reduced near-term litigation risk, which the analyst believes provides more certainty around capital returns.
The favorable forecast also includes an expectation of a compound annual growth rate (CAGR) in earnings per share (EPS) of around 11% for Imperial Brands from the fiscal year 2024 to 2026. This growth rate is notably higher than the low single-digit CAGR projected for British American Tobacco during the same period.
Morgan Stanley's equity strategists have recently adopted a more cautious stance on defensive stocks after a period of outperformance. This shift in strategy emphasizes the importance of selective stock allocation. The firm's preference for Imperial Brands over British American Tobacco is reinforced by this change in market strategy.
The upgrade and revised price target indicate a positive outlook for Imperial Brands, as perceived by Morgan Stanley, based on the company's expected share buybacks and earnings growth potential in comparison to its industry peer.
InvestingPro Insights
The recent upgrade by Morgan Stanley aligns with several key metrics and insights from InvestingPro. Imperial Brands' (OTC: IMBBY) financial health and shareholder-friendly policies are reflected in its current market performance and valuation.
InvestingPro data shows that Imperial Brands is trading at a P/E ratio of 9.29, which is considered low relative to its near-term earnings growth. This supports Morgan Stanley's positive outlook on the company's earnings potential. Additionally, the company's dividend yield stands at an attractive 6.56%, underscoring the "InvestingPro Tip" that Imperial Brands "pays a significant dividend to shareholders."
The company's aggressive share buyback strategy, as highlighted by Morgan Stanley, is corroborated by an InvestingPro Tip indicating that "management has been aggressively buying back shares." This aligns with the analyst's projection of substantial share repurchases over the next three years.
Furthermore, Imperial Brands' valuation metrics suggest a strong free cash flow yield, which could provide the financial flexibility needed to support both dividends and share buybacks. The company has maintained dividend payments for 28 consecutive years, demonstrating a consistent commitment to shareholder returns.
For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips for Imperial Brands, providing a deeper understanding of the company's financial position and market outlook.
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