As good as it sounds, a sky-high dividend yield can often be a red flag when it comes to accessing the best income stocks on the UK market. Does this apply to FTSE 100 tobacco giant Imperial Brands (LSE: IMB)? To help answer this question, it’s worth taking a quick look over today’s full-year numbers.
Transformation on track
Based on this morning’s report, CEO Stefan Bomhard’s plan to increase investment in its top-five priority markets (which bring in the majority of profit) looks to be bearing fruit. Market share gains were seen in the US, UK and Spain, although Germany and Australia still declined. On top of this, losses at its next-generation product (NGP) division fell by 57% as a result of the company’s decision to exit specific markets.
All told, revenue at the top tier stock rose 0.7% to £32.8bn in the 12 months to the end of September. Operating profit climbed by 15.2% (or £415m) to £3.15bn, albeit supported by the sale of Imperial’s premium cigar business for £281m.
So, the outlook is positive?
To a point. Looking ahead, IMB stated that it remains on track with the five-year plan outlined at the beginning of the year. 2022 will be a year “of further reorganisation and change“, with adjusted operating profit forecast to rise at a “slightly slower” rate than net revenue due to further investment.
Of course, nothing is ever certain. The ongoing Covid-19 pandemic could still have an influence on sales (and the speed of IMB’s transformation). The company could also face cost pressures going forward.
Notwithstanding these potential headwinds, it would seem that investors weren’t hugely dissatisfied with today’s report. As I type, the IMB share price is down only slightly.
Let’s return to those dividends.
Huge dividend yield!
Today, IMB announced a 1% rise to the total dividend. A 139p per share payout gives a trailing yield of 8.7%. For FY22, analysts are expecting this to increase to 143p, which would mean a stonking 9% yield.
For perspective, the FTSE 100 returns ‘just’ 3.4%. Given the inflationary times that we live in, IMB’s cash returns have got to be worth the risk, right?
Well, I’m torn. On the one hand, the tobacco industry looks to be in a state of (very) long-term decline. Backing this up, IMB stock has more than halved in value in the last five years. While the dividends have helped cushion this blow, it’s hardly what investors want to see, especially as other FTSE 100 ‘sin stocks’ have fared better.
Then again, one could say that an awful lot of negativity is priced in. Right now, Imperial stock trades on a little over six times forecast earnings. With expectations this low, one might speculate that only a small profit beat could bring forth a recovery.
Going back to my earlier question, those dividends should also be safely covered by earnings. This makes a cut unlikely in the near future.
Cheap FTSE 100 stock
As things stand, I wouldn’t be averse to buying IMB for a purely dividend-focused portfolio. That income stream really does look great.
Having said this, I would ensure I was diversified elsewhere in the FTSE 100 beforehand. Since a share price recovery still looks some way off (if it comes at all), I’d also need to be comfortable holding for years rather than months.
