It seems somewhat surprising to me that Imperial Brands (LSE: IMB) shares have marched 10% higher over the last few days. After all, it was only in early October when Rishi Sunak proposed stopping anyone aged 14 or younger from ever legally buying cigarettes in England.
Given this proposed crackdown on smoking, and possibly vaping too, I’d have expected the opposite share price reaction. And this is why I’m a long-term investor and not a day trader. My crystal ball malfunctions far too often for me to ever make much money ‘trading’.
But even after the recent share price rise, tobacco company Imperial Brands has an eye-catching dividend yield of 8.3%. That’s one of the highest yields in the FTSE 100 today.
So, should I invest? And how many shares would I need to target £1,000 a year in passive income?
Well, the Imperial dividend is 146p per share today. And a share price of 1,755p means I’d need approximately 685 shares to aim for £1k a year in passive income. They would set me back around £12k.
Now, no dividend is guaranteed, but the payout looks to be secure here. That’s because the forecast dividend for the current financial year is covered more than 2.5 times by free cash flow.
Plus, if I became a shareholder, I’d take comfort in the firm’s strong brands, notably Lambert & Butler and Golden Virginia. It also owns Rizla, which is one of only a few brands — along with Coca-Cola, Hoover, Jacuzzi, Tupperware etc — whose name defines the product.
By and large, investors hold tobacco stocks for the share buybacks and high level of income on offer. And in its latest market update on 5 October, Imperial delivered on both counts.
It announced a £1.1bn buyback for its new financial year (which started on 1 October), a 10% increase on last year. Plus, it expects total shareholder payouts including dividends to exceed £2.4bn this year. That’s around 15% of its market cap.
Also encouraging is that full-year revenue excluding exchange rate fluctuations is expected to grow in the low single digits. Overall sales of both combustibles and next-generation products (which include vapes) have been growing. Underlying operating profit growth is expected to be in the mid single digits.
This good news enabled investors to overlook Rishi Sunak’s announcement. At least for now.
Do I need the worry?
Unfortunately, I can’t quite so easily shrug off the risks, despite the generous income on offer. Under the proposed crackdown, someone born on or after 1 January 2009 will never legally be allowed to buy tobacco. New Zealand has already made this law.
Do I see more countries, particularly across Europe, doing something similar? I do, yes. The number of cigarette smokers worldwide is already in long-term decline, and that’s without further regulatory onslaughts.
Also, I expect more legislation targeting vapes, especially those yummy-sounding flavoured ones I’d normally associate with a sweet shop. That could harm the company’s already anaemic long-term growth prospects.
Finally, many institutional investors aren’t allowed to invest in the tobacco sector, for obvious reasons. I don’t see that changing, which means the shares could be lowly rated permanently.
Given all this, I’m not interested in buying this tobacco stock for passive income.