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2 dividend stocks I’d consider buying in May

Image: Centamin. Fair Use.

Investors looking for reliable income are probably more likely to choose tobacco than gold. But will this approach prove to be short-sighted? In today’s article I’ll take a look at the latest figures from one company in each of these sectors.

Another 10% dividend hike

Wednesday’s half-year results from Imperial Brands (LSE: IMB) confirmed the group’s policy of increasing dividend payment by 10% each year. Imperial’s interim payout rose from 47p to 51.7p per share. That leaves Imperial on track to deliver a full-year payout of 171.1p per share, which is equivalent to a yield of 4.6%.

Of course, tobacco is a business that’s in decline. Imperial’s tobacco volumes fell by 5.7% to 126.3bn stick equivalents (SE) during the first half of the year. Tobacco net revenue, which excludes taxes, rose by 9.3% to £3,716m at actual exchange rates, but would have fallen by 5.5% if exchange rates had remained unchanged compared to the first half of last year.

The group’s approach to this challenge is to focus on consolidating its sales into a smaller portfolio of its most profitable brands. This appears to be working, as sales of Imperial’s growth brands rose by 3.2% to 73bn SE during the first half. However, increased investment in marketing and other brand-building exercises dented profits. The group’s operating profit fell by 10% to £902m during the first half.

Buy Imperial for income?

This tobacco giant remains a highly cash-generative business. If you’re looking for a pure income stock, then I believe that Imperial Brand’s forecast P/E of 13.8 and dividend yield of 4.6% remain attractive. But for investors seeking growth as well, I think there may be better options elsewhere.

An income from gold?

Egypt-focused gold miner Centamin (LSE: CEY) fell by 5% on Wednesday, after the firm’s first-quarter update left investors fretting about the operational and political risks facing the group.

On an operational level, a move into a lower-grade area of the Sukari mine led to a 20% decline in first-quarter production, which fell to 109,187 ounces. Lower production and lower grades pushed up the group’s all-in sustaining cost (AISC) to $887 per ounce, significantly above full-year guidance of $790/ounce.

Mining output is expected to improve as the year progresses, and management reiterated its full-year production guidance of 540,000 ounces of gold at an AISC of $790/ounce today.  

In some ways, I’m more worried about the political and legal risks facing the group.

Centamin is involved in two long-running legal disputes which date back to 2012. One of these relates to the validity of its mining licence. This remains under appeal, with several possible outcomes, at least one of which could disrupt Centamin’s mining operations.

The other case is a dispute over whether the company should buy fuel at international prices or locally-subsidised rates.

Today’s update warns that Centamin has received an “unfavourable” but non-binding report about the fuel case. However, the company has been paying international fuel prices since 2012 to ensure a reliable fuel supply. This hasn’t prevented strong cash generation or dividend growth, so I’m not overly concerned about this case.

After today’s fall, Centamin stock trades on a forecast P/E of 16 with a prospective yield of 3.1%. That looks fully-priced, given the political risk, so I’d hold for the time being.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.