I don’t buy tobacco stocks, but if I did I would have snapped up Imperial Brands (LSE: IMB) shares ages ago. Like its FTSE 100 rival British American Tobacco, the cigarette maker has been one of the best dividend stocks on the index for as long as I can remember.
While smoking demand is fading in the West, it’s still thriving elsewhere. Imperial Brands is the world’s sixth-largest international cigarette company and sells more than 320bn of them a year in more than 160 countries. Top-selling brands including Davidoff, Gauloises, Winston and Lambert & Butler, along with Golden Virginia fine cut tobacco and Rizla rolling papers.
Smoking is still big business
Like big tobacco generally, it’s also shifting into next generation products (NGPs), such as its e-vapour brand blu. This is a solid business with a huge customer base, whose shares look a steal at today’s valuation of just 6.7 times earnings. That’s just half the 15 times that’s seen as representing fair value for a stock.
That doesn’t mean the Imperial Brands share price will suddenly more than double, it’s been trading at a low valuation for ages. Yet it dramatically reduces the risk of overpaying if I bought the shares today.
The stock hasn’t done much lately, falling 33.71% over five years and 2.45% over the last 12 months. But the truth is most investors buy it for the dividend. I’d treat share price growth – and there has been plenty over the years – as a bonus.
The big attraction here is the dividend. Imperial Brands shares are forecast to yield a stunning 8.2% in the year ahead. This is not just one of the most generous dividends on the index but looks like one of the safest too, as it’s covered 1.9 times by earnings. So what if I decided to go all in and use it to fund my entire retirement income?
Let’s say I’d like an income of £30,000 a year in retirement, on top of my £10,600 State Pension. Imperial Brands is forecast to pay a dividend of 145p per share in 2023. That means I’d have to buy 20,690 shares. At today’s price of 1,780p per share, I’d need to invest a thumping £368,282. Which would involve selling nearly every SIPP and ISA holding and throwing every penny into this one stock.
I won’t go all in on any stock
Clearly, I wouldn’t do that even if I bought tobacco stocks, because diversification would be a huge issue. My future would rest entirely on one company’s dividend.
Yet I think the company’s prospects are solid. First-half revenues increased by 4.8% to £3.66bn, which looks good even though they fell 1% when adjusted for constant movements. Imperial Brands is increasing market share while net revenue from NGPs grew 19.8% last year, following successful product launches.
Net debt is high at £9.8bn, which is pretty big for a £16.24bn company, especially with interest rates climbing. The dividend remains solid though, with the company finding cash to complete a £1bn share buy back for good measure.
Imperial Brands remains a terrific income stock. I just wouldn’t bet my entire retirement on it. Or any company, for that matter.
