Investors in the FTSE 100 are spoilt for choice when it comes to dividends. Only five of the 100 companies on offer pay zero dividends. Meanwhile, the average payout by the top five most generous dividend stocks is a staggering 9.7%.
Imperial Brands (LSE:IMB) is among the highest dividend-yielders in the index, paying 8%.
So, should investors consider adding the tobacco giant to their portfolios for monster dividends in 2024?
Earnings on fire
Imperial Brands showed a robust financial performance in financial year 2023, reporting net income of £2.4bn. A notable 26% increase in new tobacco products (snus, heated tobacco products, vaping, nicotine pouches) bolstered those earnings.
The company saw revenue growth of up to 40% in Europe, driven particularly by heated tobacco products. These achievements are part of a broader strategy to expand in key markets, with dividends increasing by 4% and share buybacks by 10%.
Smoke curtain
Despite these strong results, there are factors that make me wary about investing my hard-earned money in Imperial Brands.
The regulatory environment for tobacco companies is tightening, with stringent public health measures potentially impacting longer-term profitability. Looking at the UK, in October 2023 the government said it would introduce a law to ban the sale of tobacco for everyone born on or after 1 January 2009.
In the company’s latest annual report, it refers to the UK as a “higher-margin” market, saying the country accounted for 7% of net revenue. Although that’s a small slice of the pie, it’s worth noting that the UK has previously been a trailblazer in terms of anti-smoking legislation. For example, it was one of the first countries globally to ban indoor smoking in 2007. Therefore, the slow march towards prohibition of tobacco in the UK could be an ominous sign of things to come for Imperial Brands in other rich European nations.
Unstable dividend history
When looking for companies to add to my dividend portfolio, as well as size of the payouts I’m also interested in consistency. That’s why I usually only consider Dividend Aristocrats – that is, companies that have increased their payout for 25 consecutive years. Past results aren’t a guarantee of future returns. However, such a record shows a robust business model that has been able to withstand and thrive during tough times.
Imperial Brands, however, is far from making it into this exclusive group. The company’s dividend was £2.07 in 2019, compared with £1.47 in 2023. Shareholders who bought in 2019 expecting a continual march upwards in payouts would have been sorely disappointed. Add in the fact that the company’s share price has dropped by 22% over the past five years.
I’m not tempted to add Imperial Brands to my portfolio, due to its unstable dividend payouts and poor share-price performance. In addition, I see serious headwinds from increasingly stringent policies, spearheaded in the UK, that seek to force smokers to quit or otherwise buy their tobacco on the black market.
