The Motley Fool

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

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.

Person smoking cigarette
Image source: Getty Images.

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.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

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.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.