Down 15%, is this LSE stock a no-brainer buy for high passive income?

This LSE stock looks a passive income winner to me, with solid H1 results, an 8%+ yield, and trading at a 15% discount to its 2023 high.

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I look at three key factors when choosing companies to generate significant passive income. First comes dividend yield, then dividend cover, and finally business fundamentals. I also like a stock that is trading at a significant discount to its recent high.

Imperial Brands (LSE: IMB) ticks all three key factor boxes for me. And it is also trading at 15% less than its 27 February high this year.

From a valuation perspective, it has a P/E ratio of 9.87 that has been stable for some time. This compares to a current average trailing P/E ratio of just under 11 for FTSE 100 firms in general.

This means I am less likely to lose passive income gains on adverse share price movements. The stock might even gain over time, supported by the £1bn share buyback to be completed this year.

Good business fundamentals

In its H1 results, the company reported adjusted operating profit up 0.8% to £1.6bn, on a revenue rise of 0.3%.

The bulk of this came from a 19.8% increase in the net revenue of its next-generation products (NGP). These include vaping and other oral nicotine items.

At the same time, volumes of its traditional tobacco products dropped 12.7%, driven by its exit from Russia.

These numbers reflect the company’s strategic plan launched in 2021 to counteract the broad-based decline in smoking. This factor remains a risk for the shares, as does further legal action over health damage done by its products.

The new five-year plan sees its tobacco business focus on five markets — the US, Germany, UK, Australia, and Spain. These represent more than 70% of its tobacco operating profit. For its NGP products, it is beefing up investment, especially in Europe.

Star shareholder rewards

Last year, the company paid a total of 141.17p for a yield of 7.6%. In 2021, it paid 139.08p (8.9%), and in 2020 it was 137.71p (10.1%).

Important as well for me was that each of these dividends was well covered. A cover ratio above 2 is considered good, while below 1.5 may indicate the risk of a potential dividend cut. For Imperial Brands, the ratios were 1.88 in 2022, 1.78 in 2021, and 1.85 in 2020 – all fine.

In its H1 2023 results, it increased the second interim dividend by 1.5%, as it had the first, to 21.59p.

If it also increased the last two dividends by 1.5%, the total payment would be 143.28p. Based on the current share price of £17.71, this would yield 8.1%.

Serious passive income generator

Given this, a £10,000 investment now would make me £810 per year. Over 10 years, I could make £8,100 in passive income, on top of my £10,000 investment.

This return would not include further gains from any reinvestment of dividends or share price appreciation. Of course, it would also not account for any tax liabilities or share price falls.

I already have other holdings that offer good dividend yields and share price growth prospects. If I did not, I would buy these shares now for two key reasons.

First and foremost, the high passive income I could make. Second, the possibility of at least some of the recent share price declines being recouped over time.

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 assessed. Consider taking independent financial advice.

Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. 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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