The FTSE 100 is home to some of the biggest high-dividend-yield companies on the London Stock Exchange. And one firm that seems to be getting attention from income investors is Imperial Brands (LSE:IMB).
The tobacco enterprise has been steadily stealing market share and executing price hikes in the ongoing inflationary environment. This ultimately translated into yet another dividend hike for shareholders along with the continuation of a £1.1bn share buyback programme.
Those certainly sound like winning traits for a dividend portfolio. So should investors be considering buying a piece of this enterprise?
A sustainable yield
Tobacco companies aren’t everyone’s cup of tea. The health impact of smoking tobacco products is well known, and with the rise of ESG investing, companies like Imperial Brands have steadily been losing popularity among investors.
However, unpopular stocks have a habit of being terrific investments since they’re often underestimated. And looking at the group’s recent performance, there’s plenty to be bullish about.
Its core product portfolio has seen sales shrink on the back of reduced volumes as the impact of exiting Russia emerges. But sales from its Next Generation Products (NGPs) have been far more encouraging, with net revenue growth up by 26%!
Seeing the firm find success with NGPs is particularly encouraging. After all, these are the group’s non-combustible products, such as vaping devices, heated tobacco, and oral nicotine, that have far less harmful health side effects.
Overall, underlying margins improved, cash generation remained robust, and it looks like the dividends won’t stop flowing any time soon. Pairing all this with a seemingly dirt cheap price-to-earnings (P/E) ratio of 7.4 makes the 7.9% dividend yield look like a very attractive addition to an income portfolio, in my opinion. Having said that, some caution is probably warranted.
An uncertain threat
While Imperial Brands continues to be resilient, its days may be numbered. The recent policy proposal from the UK government to ban smoking in the next few decades is yet another move to restrict the consumption of Imperial Brands’ combustible products.
Management’s solution to the increasingly strict regulatory environment is its NGPs. However, even these have started catching the attention of the FDA in America, which has hampered performance.
In the meantime, these continue to incur some fairly chunky losses for the business. And there’s a giant question mark over whether they’ll be able to reach the same level of profitability as traditional cigarettes in the long run.
This uncertainty may very well explain why Imperial Brands shares are priced so cheaply. So while the dividends look rock solid today, this may change over the coming decade. And if the share price continues to retreat over the same period in anticipation of a payout cut, investors may be left disappointed, even with a near-8% yield.
Therefore, I think it may be wiser to look for other income stocks with a more transparent future.
