When looking for opportunities to pick up a high dividend yield stock for the longer term, one must not only focus on the headline number, but also dig below the surface to see if the business has fundamental value. This allows the investor not only to pick up the dividend but also be confident of not facing a large capital depreciation from performance of the underlying share price. It is for this reason that I like Imperial Brands (LSE: IMB) at the moment.
What is the dividend yield?
Imperial has long been a retail investor favourite due to the high dividend it traditionally offered. The current trailing dividend yield is currently at circa 9%, which puts it in the top five of all companies within the FTSE 100 currently.
It has recently announced that this will be cut for next year, and thus has a forward yield of just under 6% – still plenty strong enough. This enables investors to hold this in their ISA and pick up a strong income going forward, without the need to be buying and selling it with frequency outside of the ISA wrapper.
What are the fundamentals?
As mentioned at the beginning, a high dividend yield is only one part of the equation. A business needs to be robust to enable confidence in longer-term dividend pay-outs. I like Imperial Brands for this reason. The cut in dividend is associated with giving the firm greater freedom to invest in key brands going forward, in particular the e-cigarette/vaping sector.
The company calls this area ‘Next Generation Products’ and is reportedly an area that it is pushing hard towards. It picked up a stake in Auxly Cannabis Group recently, which caught headlines, but the flagship brand here is Blu Cigs.
Blu Cigs was bought by Imperial around five years ago. Since then the sector growth has boomed, particularly here in the UK. Data from the World Health Organisation shows that around 10 million adults vaped in 2012, which increased to 41 million in 2018 and is expected to reach almost 55 million by 2021.
With Blu Cigs in the top three eCig brands globally, it will be in a strong position to capitalise on such growth, aiding Imperial’s bottom line in the future.
With ‘Next Generation Brands’ positioned worldwide, Imperial has a differentiated geographical exposure ranging from the United States to Russia, and should thus be able to withstand any idiosyncratic risks in one particular market – for example, if we see a recession here in the UK.
What are the risks?
The key risk for Imperial is tighter regulation on both conventional cigarettes and particularly on eCigs. In the news recently, President Trump has threatened to ban vaping products in the US, something that saw Imperial have intraday volatility in the share price when announced. Due to the concentration of Imperial’s brands being focused on this market, this is one concern I would flag going forward.
