May 19, 2020 / 6:47 AM / in 3 months

UPDATE 2-Imperial Brands slashes dividend as recession set to hit spending on pricier cigarettes

* COVID impact to hit full-year EPS by low-single-digits

* Dividend cut by a third

* Shares down 8%, top loser on FTSE (Adds details on dividend, outlook, CEO quote, shares)

By Siddharth Cavale

May 19 (Reuters) - Imperial Brands Plc, maker of Winston and Gauloises cigarettes, said on Tuesday it will cut its annual dividend by a third as it expects the coronavirus to hit travel and spending in coming months.

Imperial is the fifth-highest yielding dividend stock on Britain's FTSE 100 and news that it was slashing its payout sent its shares tumbling 8% in morning trade, the FTSE's top loser.

While the company joins a crowd of FTSE 100 companies that have cut dividends in recent months, including Barclays PLC , WPP, Whitbread and Glencore, it is the first tobacco maker to do so.

"Despite the tougher times faced by the industry in recent years, the likes of Imperial were still seen as dependable dividend payers, and this morning’s rebasing of the dividend is yet another blow for income investors,” said Helal Miah, Investment Research Analyst at The Share Centre.

Imperial said the coronavirus pandemic had no "material impact" on its business in the first half of its financial year, which began on Oct.1, largely due to widespread lockdowns being implemented only in late March and consumers stockpiling cigarettes.

However, with curbs on travel globally expected to continue for the rest of the year and consumers buying fewer cigarettes as they run through their stocks, Imperial said the second half impact on earnings per share would be more pronounced.

It now expects coronavirus-related factors to reduce earnings per share by 1-3% for the financial year ending in Sept. 2020, also taking into account a rise in demand for cheaper cigarettes as economies go into recession.

The UK-based company, however, argued it was better placed than rivals in a downtrading scenario as it sells more discount and deep discount brands than premium products.

This helped it gain market share in seven out of its 10 core markets, including in markets where it has not grown for many years such as Spain and the United States in the first half of the year, joint CEO Dominic Brisby said on a call with journalists.

"Imperial as a company has been particularly good at managing down trading and ...discount and low-priced brands in the tobacco category," Brisby said.

Imperial, whose shares had already fallen 16% this year before Tuesday's slide, also said that it would be reducing marketing spending on its next generation products - e-cigarettes and heat not burn products - that were once considered the next frontier for the tobacco industry.

The company, which makes the blu e-cigarettes, said it would now reduce spending on out-of-home media and radio and TV, after making significant investments in these areas in several markets last year. "While these can be very effective in building brands, they haven't generally returned the rapid return on investment we required this year," Brisby said.

Imperial will cut its annual dividend to 137.7 pence per share from 206.57 last year, to preserve cash and help pay off its debt pile of 14 billion pounds. This comes after it sold its premium cigar business to a consortium of investors for 1.2 billion pounds in April.

Overall, group tobacco and next generation products revenues fell 0.9% on a constant-currency basis to 3.59 billion pounds ($4.40 billion) in the first half of the year. Analysts on average were expecting 3.6 billion pounds, according to a company supplied consensus.

$1 = 0.8159 pounds Reporting by Siddharth Cavale in Bengaluru; Editing by Bernard Orr and Susan Fenton

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