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Does a 9% dividend yield make the Imperial Brands stock a good investment?

A person holding onto a fan of twenty pound notes
Image source: Getty Images.

With a huge dividend yield of 9%, the tobacco biggie Imperial Brands (LSE: IMB) looks like a potentially good buy for my income portfolio. There is only a handful of FTSE 100 companies that offer higher yields. 

The advantage in Imperial Brands’ dividends

And the ones that do are mostly in cyclical industries like mining and real estate, that have enjoyed the boom in their respective sectors recently. But I am not sure if they can continue to pay high dividends once the high growth phase subsides. Imperial Brands, on the other hand, offers a far more dependable stream of passive income. 

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Smokers do not quit easily, which means that irrespective of whether the economy is in a boom or a bust, tobacco companies’ fortunes are unlikely to waver much. And this translates into continuity in dividend payouts. This is evident in the Imperial Brands’ consistent dividends over time. And big dividends, at that. For around the past three years, it has had a dividend yield of over 8% and through much of last year, was actually in double digits. 

Share price decline pushes up dividend yield

There is a catch to this FTSE 100 stock, however. Its share price has been steadily declining. In the past five years, it has more than halved, which also explains its rising dividend yield. The yield is nothing more than the dividend amount divided by share price. So as the share price falls, the yield rises without any change in dividend amounts.

Nevertheless, it can still be worth my while to buy the stock, which incidentally, I already have, if its price can be expected to rise in the future. That is possible. The Imperial Brands share price has risen some 9% in the past year, albeit in fits and starts. And it is still around 25% below its pre-pandemic levels. 

Strong performance for Imperial Brands

In the meantime, its performance has only strengthened. For the half-year ending 30 March 2021, it reported a 6% increase in revenue and a massive 244% rise in earnings per share (EPS) over the year before. And this followed a healthy performance in the full-year 2020. Even in its trading update released earlier today, the company expects to meet its guidance. And there is nothing about it really to encourage pessimism in the stock. 

Why are investors disappointed?

Yet, the Imperial Brands’ share price is down by almost 3.5% today, making it among the biggest FTSE 100 losers today. This is partly a result of overall market weakness, with the FTSE 100 index down by 1.5% as I write. But this probably has something to do with its update as well. 

There is little in it that encourages me to think that it is on a long-term growth path. Next generation products (NGPs), which include products like vapes, are expected to show the same revenue levels in the second-half of the year as they did in the first half. As an investor, I would ideally like to see more growth from this segment, as traditional tobacco products are steadily losing market. 

What I’d do

For now, however, I continue to hold the stock and will make up my mind about what to do next about my shareholding after seeing its full-year results in November. 

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Manika Premsingh 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.

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