Why do tobacco companies pay huge dividends?

Question

I noticed that tobacco companies pay huge dividends. For example Imperial Brands is expected to pay 12.22%. I can see that a tobacco company would want to pay some dividend because it operates in an old sector, is likely old, and there might not be much else to conquer without leaving the sector the company is good at operating in.

But tobacco company's stocks are declining in value. As public companies are controlled by their shareholders, to me that behavior means that interest in their products is waning and they feel like they should scale back their operations and instead cash out, basically selling off the entire company.

But I don't see interest in cigarettes waning. Lots of people smoke and vaping is taking off. Given that some of those companies already produce vaping devices (including the example company Imperial Brands) and that tobacco companies seem to be really profitable (after all, they're giving away double digits dividends), I can't see why they don't invest more to grow their operations (for example to capture more of the emerging vaping market) instead of paying out high dividends. What's their strategy?

Answer 1

Large dividends can be caused by a few different reasons, one of them could be poor outlook for the stock despite steady profits and dividend payouts. The yield is high because of a depressed stock price. Alternatively, the high dividend could be being used by the board of directors to encourage institutional ownership.

Corporations are dynamic things, and just because their core industry is dying does not mean that the company will not be wildly profitable in the future. Intuit is a company that keeps reinventing itself to stay relevant. After Quicken became obsolete, they moved into other parts of FinTech to remain profitable. Conversely, the company KayPro made great portable computers prior to Microsoft and Intel but died, missing out on the PC boom when they should have been able to dominate it.

What happens if cannabis becomes 100% legal, even for recreational use. Could these tobacco companies scoop up these small time players and run the operations more efficiently? Probably. Could they provide a better product then the existing vaping companies? Maybe.

People have been counting the tobacco companies dead since the late 1980's when they were held liable for several class action suits. However, they still keep trucking.

Keep in mind that the verdict is still out on vaping. One women's health provider, I know, tells her pregnant patients that she would rather have them smoking then vaping. Her justification for this position is that there is no research on the effects of vaping and a fetus. What happens to vaping if emissions from the heating coils is linked to brain cancer in both the smoker and fetus? What happens if Imperial Brands purchases a vaping company that provides a new type of machine that is clinically proven to offer no adverse side effects?

It is very hard to predict the future.

Have you looked at Imperial's annual report? They probably talk about their justification for high dividends and their strategy there.

Answer 2

The example company can pay more in dividends than it has in net earnings, for instance, because some of its expense is non-cash depreciation of goodwill. Of course goodwill relates to things like brand-names acquired in mergers.

The company must maintain good stock support, for instance with a high dividend payout, to be able to roll-over its debt at bond redemptions. The buyers of the bonds likely require the ability to short-sell a liquid stock of the same company. The debt-to-equity ratio of the company is about 237 to 1.

If they hire me at CEO I will carry the company additionally into caffeine-delivery-systems by distribution of refrigerated beverages. The refrigerated beverages will require very little preservatives and very little sugar and will be a unique premium product.