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Why I’d pile into this FTSE 100 7% yielder and Neil Woodford favourite right now

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There’s no denying that Imperial Brands  (LSE: IMB) is a favourite of well-known fund manager Neil Woodford because the stock is the largest holding by weighting in both his Income Focus and Equity Income funds.

Good dividend record

I can see the attraction. The smoking-focused fast-moving consumer goods company has a phenomenal record of raising its annual dividend, which is up almost 62% over five years. The business generates super-reliable cash flow driven by products serving what must be one of the most predictable repeat-purchase markets ever known.

Let’s be blunt, addiction keeps customers coming back for more in a manner you can almost set your watch by. The annual figure for cash from operations is up around 51% over the past five years and the record has a consistency that you rarely see from other types of businesses. As smoking continues its gradual decline in the developed world, Imperial Brands is building up sales of its Next-Generation Products based around vaping and the like, suggesting the dividend growth story has plenty of mileage in it yet.

But the stock has plummeted over the past year or so, caught up in what looks like a general sell-off of ‘defensive’ type shares due to over-valuation and a possible rotation of investors into cheaper-looking cyclical firms. I’ve been watching with interest and think there is some evidence of basing on the chart, suggesting the big falls may be over. Indeed, at today’s 2,743p, the shares have stair-stepped up around 18% from their March nadir. Suddenly, Imperial Brands is looking appealing again, at least to me.

Encouraging results

Today’s interim results are encouraging. Although total tobacco volumes declined by 2.1% compared to the figure a year ago, growth brand volume grew 6.3%. Overall constant currency adjusted operating profit eased back 2.2% and adjusted earnings per share declined 1%. One feature of the accounts over the years has been the high borrowings figure, justified by exemplary cash inflows. We learn today that adjusted net debt is down 9% to around £12.7bn – still around five-and-a-half times last year’s operating profit. But chief executive Alison Cooper explained in today’s report that the company is aiming to raise around £2bn over the next year or two by divesting bits of the business. She said: “This will further simplify the business, enhance performance and release capital to pay down debt, deliver returns to our shareholders and, where appropriate, invest in our growth agenda.”

I reckon Next Generation Products are the key to a successful long-term investing outcome with Imperial Brands. The firm’s myblu brand is now available in the US, the UK, France, Germany and Russia, with more launches planned for the second half of the year. There’s also a vibrant research and development programme, which has led to the upcoming launch of nicotine salt pods. Meanwhile, a new advanced tank system called blu ACE aims to “bring open systems to a wider consumer base,” and the firm is looking at options for heated tobacco with second stage consumer trials planned “in the next few months.” There’s a lot going on in the business and I think it’s worth collecting the 6.8% forward dividend yield while waiting for the share price to recover.

Buy-And-Hold Investing

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.