Does Imperial Brands share price weakness offer me a top dividend buy?

Even with a rebased dividend, the low Imperial Brands share price still puts yields above 8%. It’s one of my top FTSE 100 dividend buys.

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After I recently examined Imperial Brands (LSE: IMB), the upwards momentum has continued. In 2021, the Imperial Brands share price is up 6%. Still, it’s dropped 3% on Thursday as I write, and is now behind the FTSE 100 year-to-date. And the shares are down 57% over five years. But since November’s lows, we are looking at a 34% gain. So is there really a long-term recovery for Imperial Brands happening?

This month’s first-half results looked good. Reported revenue was 6.1% ahead of last year, as the company says it benefited from strong pricing. Statutory results were weighted positively with one-offs. But on an adjusted basis, the figures were still impressive. Operating profit gained 8.1%, with earnings per share up 6.9%. The company lifted its interim dividend by 1%.

So why is the Imperial Brands share price one of the few in the FTSE 100 still way below pre-pandemic levels? Improving profits might not satisfy investors if a company is racking up debt. But that’s not the case at Imperial Brands. No, the company reported “good deleverage progress with net debt reduced by >£3bn on a 12-month basis.”

Imperial Brands share price valuation

Overall, Imperial says its “full year guidance remains unchanged with low-mid single-digit organic adjusted operating profit growth.” That suggests the second half will not be quite as good. But we’re probably looking at a forward P/E of around 6.3. That’s based on the current Imperial Brands share price, which has risen since November. It’s almost scary to think that back then, IMB shares could have been picked up on a P/E of under five.

Imperial brands has long enjoyed strong cash flow with solid cash conversion. And that’s one of the things that has made me see it as a solid dividend stock. But that was reset last year, as the company rebased its dividends. It was part of deleveraging and debt reduction. Now, I don’t like to see dividends cut. But I do think it’s better to deleverage now in order to support a more reliable long-term payment strategy. Paying big dividends while shouldering big debt has never struck me as a good idea.

What’s holding it back?

If the dividend this year rises in line with operating profit guidance, I think we should see around 140p per share. With the Imperial Brands share price at 1,630p as I write, that would be an 8.6% yield. And we’d probably see cover by earnings of around 1.9 times. So, one of the FTSE 100’s best yields, with strong cover. Why isn’t the market interested?

It’s surely got to be down to fears over the long-term future of tobacco. I’ve made the mistake of thinking BP and Shell would be fine during my investing lifetime, despite the move from fossils fuels. But both dividends have been cut and both share prices have slumped. Still, I doubt the world will move to kick the tobacco habit in anything like the same timescale. There’s a risk I’ve got it wrong again, sure. But the low Imperial Brands share price still puts the stock on my dividend shortlist.

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 considered so you should consider taking independent financial advice.

Alan Oscroft has no position in any of the 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.

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