Does it make sense for an organization’s gross sales to be shrinking but its share price to soar? One FTSE 100 firm has been in simply that place recently.

Its share price has grown 41% in 2024, but in its most up-to-date annual outcomes (to the tip of September), gross sales truly declined barely in comparison with the prior 12 months interval.

This can be a inventory I used to carry however bought some years in the past, that means I’ve missed out on that leap of over two-fifths in share price this 12 months. On prime of that, by not proudly owning the share I’m lacking out on a juicy dividend yield, that presently stands at 6%.

Ought I so as to add it again into my portfolio? I don’t assume so and can clarify some execs and cons underpinning my alternative under.

Effectively-known enterprise in a mature business

The corporate in query is Imperial Manufacturers (LSE: IMB).

Its outdated title of Imperial Tobacco was clearer about how the corporate makes its cash. It makes and sells cigarettes below a wide range of manufacturers worldwide. It additionally gives non-cigarette codecs though it has been pushing much less aggressively than some rivals into that market, focusing as a substitute on rising its market share within the declining however nonetheless enormous cigarette house.

Getting cash in declining markets

I discussed above that gross sales revenues fell within the firm’s most up-to-date monetary 12 months, however in equity that was solely by 0.2%. They nonetheless got here in at £32bn, which I see as substantial.

That was the third consecutive interval of declining gross sales although, reflecting Imperial’s concentrate on a market that’s shrinking over time.

The underside line did higher, with earnings per share leaping 19% 12 months on 12 months.

That displays the pricing energy of firms promoting addictive merchandise with premium manufacturers. They will push the price up to compensate for falling gross sales.

Earnings points

In truth, that’s precisely what appears to be occurring with this explicit FTSE 100 enterprise. Pricing moved up 7.8% but gross sales revenues nonetheless fell barely, that means that gross sales volumes declined greater than revenues. For cigarettes no less than, I see that as indicative of the possible long-term pattern.

Sooner or later, pricing energy reaches its limits as spiralling value will increase push down demand much more, whereas manufacturing and advertising economies of scale turn into more durable to keep up.

That’s the place I feel rivals comparable to British American Tobacco could have an edge. For now, Imperial’s much less bold push into non-cigarette merchandise has let it get monetary savings it’d in any other case spend attempting to construct demand. Long run, although, the technique might imply income fall sharply as volumes decline.

Probably good worth – or a worth entice?

Regardless of the inventory hovering this 12 months, it nonetheless trades on a price-to-earnings ratio of below 9.

With Imperial’s highly effective model portfolio, robust money move technology and beneficiant dividend yield, that might transform good worth.

However the dividend was lower as lately as 4 years in the past and I concern the run-up in share price this 12 months maybe overemphasises short-term profitability reasonably than what I see as long-term challenges to Imperial’s enterprise mannequin.

So I’ve no plans to purchase shares once more within the agency.