FTSE 100 heavyweight Imperial Brands (LSE: IMB) has been a stalwart dividend income stock for me for years. I picked these shares to pay me high dividends, which I have largely reinvested back into them. This is a standard investment process called dividend compounding.
By reinvesting in such a way, the pool of dividend payouts can grow exponentially. I aim to use them to continue reducing my working commitments when I wish.
However, a stock’s dividend yield moves in the opposite direction to its price, provided the annual payout remains the same. Imperial Brands’ share price has gained 46% over the past 12 months, so its dividend yield has dropped.
That said, analysts forecast it will increase again by the end of 2027. And there is also considerable value left in its share price too.
Dividend income potential
The tobacco and nicotine products manufacturer paid a dividend of 153.42p in 2024. This gives a current dividend yield of 4.9% on its present share price of £31.15.
However, analysts believe the dividend will rise to 163.1p this year, 170.9p next year, and 180.5p in 2027. This would give respective yields of 5.2%, 5.5%, and 5.8%. By contrast, the current average FTSE 100 dividend yield is just 3.4%.
Eleven grand (the average UK savings) would buy 353 Imperial Brands shares. So investors considering such a holding would make £6,938 in dividends over 10 years. This is based on the current 4.9% as an average and the use of dividend compounding.
On the same basis after 30 years, the dividends would have risen to £36,699. By that stage – including the initial £11,000 investment – the total value of the holding would be £47,699. And this would generate an annual dividend income of £2,338.
Share price potential
Imperial Brands’ 9.5 price-to-earnings ratio is bottom of its peer group, which averages 23.2. This comprises Altria at 12.8, Japan Tobacco at 17.7, British American Tobacco at 30.4, and Philip Morris at 32. So it is very undervalued on this measure.
A discounted cash flow (DCF) valuation shows where any firm’s stock price should trade, derived from cash flow forecasts for the underlying business. The DCF for Imperial Brands shows its shares are 43% undervalued at their current £31.15 price. Therefore, their fair value is £54.65.
How does the core business look?
A risk to the share price and dividend forecasts is the intense competition in the sector that may squeeze the firm’s margins.
However, its latest (H1 2025) results saw adjusted operating profit increase 1.8% year on year to £1.652bn. Adjusted tobacco and next-generation product (NGP, mainly nicotine replacements) revenue rose 3.2% to £3.664bn.
Revenue is the total income made by a firm, while profit (earnings) is what remains after expenses are deducted.
The firm reiterated its double-digit compound annual growth rate (CAGR) for NGP revenue to 2030 in the results document. It also forecasts low single-digit CAGR for tobacco net revenue over the same period.
And it projects annual operating profit growth of 3%-5%. It is growth here that ultimately drives any firm’s dividends and share price higher over time.
Given its earnings growth prospects, undervalued share price and higher dividend yield, I will buy more of the shares very soon.
