The Motley Fool

Is Imperial Brands plc the best dividend stock in the Footsie right now?

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.

Person smoking cigarette
Image source: Getty Images.

Shares in tobacco manufacturer Imperial Brands (LSE: IMB) are out of favour right now. After trading above 4,100p shortly after the Brexit vote, the stock has now fallen to around 3,000p today. That’s a decline of nearly 30%.

Why the fall? Well, there have been several drivers. One was the FDA’s announcement in July that it wants to cut nicotine levels in cigarettes. More recently, the CEO of larger rival Japan Tobacco stubbed out talk of a potential acquisition.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The last time Imperial shares changed hands at this level was mid-2015. That leads me to believe that the shares now offer a compelling opportunity for dividend investors. Here are a few reasons why.

6.2% yield

Let’s start with the prospective yield for FY2018. At 6.2%, this is one of the highest in the FTSE 100. Occasionally, a high yield can signal trouble. You have to be a little careful as a dividend cut could be on the horizon. Yet, in Imperial’s case, this does not appear to be the case. In my view, the stock just looks genuinely oversold.

Dividend growth

One reason I believe Imperial’s payout isn’t at risk is the company’s recent dividend growth. In November, Imperial raised its dividend by 10%. To my mind, that’s a signal of confidence from management.

If companies anticipate tough times ahead, they often freeze their payments, or limit growth to a few percent. For example, both Royal Dutch Shell and HSBC have frozen their payouts in recent years. In contrast, a 10% dividend hike suggests management believes the outlook is positive. Furthermore, the company reiterated in November that it plans to keep increasing its payout by 10% per year in the medium term so expect more growth ahead.


Imperial’s dividend coverage looks satisfactory for now. The payout ratio last year was 64%. With analysts forecasting earnings of 263p per share for FY2018, cover is expected to be around 1.4 times. While that’s not a high ratio (ideally it would be closer to 2), it’s also not one to be particularly concerned about.


The stock’s valuation also looks extremely attractive right now. Imperial’s forward-looking P/E is just 11.5. In contrast, rival British American Tobacco has a P/E of 16.1. Neil Woodford believes the valuation is unjustified, recently stating that the current share price “just looks like the wrong price.” The portfolio manager has been adding to his holding recently, as have I.


Of course, shares in Imperial Brands aren’t without their risks. One such is the threat of government regulation. Another is the long-term decline in smoking rates.

Yet for now, Imperial is still generating plenty of cash flow and its dividend looks safe. The best time to buy high-quality companies is when they’re out of favour. In Imperial’s case that’s now, in my view.   

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Edward Sheldon owns shares in Imperial Brands and Royal Dutch Shell. The Motley Fool UK has recommended HSBC Holdings, Imperial Brands, and Royal Dutch Shell B. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.