Imperial Brands (LSE: IMB) shares have taken a hit recently. As a result, they now sport a dividend yield of around 8.4%.
Are the tobacco company’s shares worth buying given this monster yield? Let’s discuss.
Two reasons to buy
Looking at Imperial Brands today, the first thing that jumps out at me is that this is a really cheap stock.
At present, City analysts expect it to generate earnings per share of 285p for the year ending 30 September. That puts the stock on a forward-looking P/E ratio of around six right now.
To put that number in perspective, the median P/E ratio across the FTSE 100 is about 13 at present. So, Imperial trades at a huge discount to the market. This means that it could be of interest to ‘value’ investors.
Another thing that strikes me here is that the company is committed to providing shareholder returns. Not only is it paying out huge dividends at present but it is also buying back a ton of its own stock.
Over the six-month period to 31 March, for example, Imperial bought £500m worth of stock. It expects to buy back another £500m worth of shares between the end of March and the end of September. These buybacks should support earnings per share.
Three reasons to pass
On the downside, this stock is stuck in a nasty downward-sloping trend at the moment. Right now, it’s near its 52-week lows. Downtrends can last for a lot longer than expected and they can hurt investors badly.
I’ve experienced this first hand with Imperial. I bought this stock around five years ago after a big fall. Unfortunately, it just kept falling and I lost money.
It’s worth noting that in recent years, Imperial Brands shares have had a strong negative correlation to tech stocks. In other words, when tech stocks have risen, the shares have fallen, and vice versa.
So, if tech shares were to experience weakness again, Imperial could see its share price rise. There’s no guarantee this will happen any time soon though.
A second issue here is that the company is facing long-term structural challenges. Not only are governments cracking down on traditional tobacco products today but they’re also getting stricter on next-generation products (NGPs) such as vapour and heated tobacco items.
This is a turn-off for me. Generally speaking, it’s much easier for companies to do well when they have tailwinds as opposed to headwinds.
Finally, debt is also worth highlighting. At 31 March, net debt stood at £10.2bn. That’s not an outrageous level of leverage but it’s also not insignificant. In the years ahead, the interest payments here could impact the company’s ability to pay dividends.
My view
Weighing everything up, I think Imperial Brands shares are best left alone today. They are cheap. But that reflects the immense challenges the company is facing in a world focused on sustainability.
All things considered, I think there are better dividend shares to buy today.
