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:

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

If I’d invested £1,000 in Tesla stock a decade ago, here’s what I’d have now!

While many of us debate whether Tesla stock is worth the price today, it's undeniable that the EV share has…

Read more »

Investing Articles

Here’s what Michael Burry did as the BP share price dipped!

The BP share price has fallen from its peaks once again, and infamous investor Michael Burry may have spotted an…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

What on earth’s going on with the Barclays share price?

The Barclays share price has skyrocketed in recent months, becoming one of the best-performing stocks on the FTSE 100 since…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Analysts say this amazing FTSE 100 stock is a takeover target!

This FTSE 100 stock's one of the worst-performing companies on the index in 2024. So why might other companies want…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

5.4% yield! 2 UK dividend shares to consider for a £1,080 passive income

I think these UK shares could provide a large and sustainable passive income. And they could be great buys today…

Read more »

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »