The Imperial Brands share price has fallen. Here’s why I’d still pick its 10% yield

The Imperial Brands share price means the tobacco giant yields 10%. Here I explain why I am a buyer.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In the past few weeks, the Imperial Brands (LSE:IMB) share price chart has headed down. It’s also down almost 20% over the past year. The share price has now got down to a point where its dividend yield is in the double digits. That is not common for a blue chip company. Obviously a lot of investors don’t feel confident about the company’s prospects.

By contrast, I remain upbeat. I see the Imperial Brands share price as a buying opportunity for my own portfolio.

A new strategy hit the Imperial Brands share price

Last month, the company unveiled a revised strategy. After a new chief executive took office last year, he reviewed the existing business. The new strategy reflects his findings.

It’s not exactly an entirely new strategy, to be clear. In some ways, it is just a slight shift of focus. There isn’t a radical overhaul in prospect. Nonetheless, it seems to have been poorly received. Imperial isn’t the only tobacco company whose share price has struggled lately – rival British American Tobacco has also headed down. This likely reflects some negative sentiment on the sector. Tobacco is seen as a declining market, after all, and the rise in ESG investing could deter some investors from buying tobacco shares. Nonetheless, with the yield now at 10%, Imperial’s strategy hasn’t done what I hoped it would, or improved investor feeling about the Bristol company’s prospects.

Personally, though, I think the new strategy makes sense. It focusses on shoring up cigarette sales in the company’s five biggest markets. While cigarette sales are declining in many markets, they remain the profit engine for Imperial. So making the most from them while it can makes sense to me. It may not be a long-term strategy, but it should help to support profitability in the short- to medium-term even in the face of declining consumer demand.

The future of Imperial

One concern about tobacco companies in general, which certainly applies to Imperial, is whether they can survive in future.

That has been a concern weighing on the Imperial Brands share price for years already. Yet Imperial has kept paying out dividends year after year. It did reduce the dividend last year, although I see that as positive in that it helps the company to pay down some of its substantial debt.

Pricing power should help the company. For example, over five years Imperial expects cigarette volume to decline 2%–3% each year in Europe. But it expects to be able to increase prices 3%–4% each year, so the market value is set to remain the same or even increase slightly despite the volume contraction.

The company’s renewed focus on cigarettes doesn’t mean that it is a one-trick pony with regards to format. It still expects cigarettes to be 80% of the market in 2025, so I appreciate its focus on them. Its approach on next generation products has so far focussed on vaping, with disappointing results. It is now shifting to focus on heated tobacco, which it reckons is more promising.

I don’t see Imperial standing still. The Imperial Brands share price with a 10% yield is attractive to me. I added to my holding after the strategy day. The recent price fall looks like a buying opportunity to me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

christopherruane owns shares of Imperial Brands. 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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »