A 7.8% yield and growing! Is the Imperial Brands dividend a passive income bargain?

The Imperial Brands dividend is growing — and the tobacco company already offers a juicy yield compared to many FTSE 100 peers. Should our writer invest?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Owning blue-chip FTSE 100 shares like Imperial Brands (LSE: IMB) can be a lucrative way to earn passive income. The Imperial Brands dividend yield already stands at 7.8%. This means that for every £100 I put in it today I would hopefully earn £7.80 each year in future.

Not only is that yield close to twice the FTSE 100 average, but it is set to rise.

The tobacco manufacturer today (15 May) announced that it plans to increase its interim dividend by 4%. That follows a 4% increase in the annual dividend last year.

So, with a high dividend yield and a growing payout per share, could Imperial Brands be a passive income bargain for my portfolio?

In a word, my answer is no. But why?

Cigarette sales are in decline in many markets and that long-term pattern looks set to continue. Indeed, revenue in the first half fell 2.3% year on year.

That is despite the pricing power offered by the company’s brand portfolio. That means it can raise its selling prices to try and counteract falling volumes. Indeed, in the latest six months, Imperial’s tobacco volumes fell 6.3% compared to the same period last year.

But wait. Exactly the same risk stalks British American Tobacco (LSE: BATS) – and I have a large shareholding in it. So why do I remain bullish on British American, yet have no plans to invest in Imperial?

Short-term strategy belies long-term challenge.

In a word: strategy. British American has been scrambling to diversify away from cigarettes in recent years. They remain the lion’s share of its business for now, but the company has been focused on growing its non-cigarette business at speed.

By contrast, Imperial has doubled down on cigarettes in recent years.

It sold its premium cigars business and reined in its non-cigarette ambitions in areas like vaping, instead focusing on gaining market share in key cigarette markets.

That might work for now (although falling revenues and earnings per share in the first half could suggest otherwise). But I think it sets the company up poorly for the long run.

No dividend is ever guaranteed

Why does that matter?

It may help explain why the share price has fallen 9% over the past five years. Then again, the British American share price has done even worse in that period, falling 16%.

But it also raises the question of whether the Imperial Brands dividend can be maintained in years to come.

British American has raised its payout per share annually for decades. But the Imperial Brands dividend was slashed by a third in 2020.

The latest results show declines in revenue, sales volume, operating profit and earnings per share. Net debt grew 3% to £10.6bn. That does not look like the performance of a business in strong shape to me.

Imperial does continue to be solidly profitable and owns an attractive portfolio of brands. Cigarette sales are falling but remain substantial.

But I am uncomfortable with the risk that the Imperial Brands dividend will be cut again in the future, as it was four years ago. I have no plans to buy.

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.

C Ruane has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and 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.

More on Investing Articles

Investing Articles

Is Amazon still a top growth stock after its Q4 report?

With sales growth slowing and AI investments weighing on near-term profits, do investors have better stocks to consider buying than…

Read more »

Investing Articles

Down 15% and with a P/E below 9! Is the GSK share price still in deep value territory?

Harvey Jones has something to celebrate after a positive set of results boosted the GSK share price after a disappointing…

Read more »

Investing Articles

The Diageo share price is down 44% since 2021, but I won’t sell my shares!

The Diageo share price has almost halved since peaking in late 2021. But with the stock at a one-year low,…

Read more »

Man changing battery on electric bicycle
Investing Articles

Suddenly my FTSE income shares are giving me growth too – including this 9% yielder!

Harvey Jones loves his FTSE 100 dividend income shares but was disappointed by the lack of growth. Now it looks…

Read more »

Investing Articles

This FTSE AIM travel business could absolutely skyrocket in 2025

FTSE AIM stock Jet2 appears to be a bargain in plain sight. I’m desperately searching for reasons not to buy…

Read more »

Investing Articles

This Bank of England news makes me fear for Lloyds and its share price!

Warnings of weak economic growth, resurgent inflation, and falling interest rates pose a toxic cocktail for Lloyds' share price.

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »