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Should you buy or sell this 7%-yielding FTSE 100 dividend stock?

The massively-uncertain sales outlook for the cigarette-alternatives market convinces me that Imperial Brands (LSE: IMB) is a stock that investors would be better off selling than hanging on to.

I used to own shares in the tobacco titan myself but sold out as the scale of regulatory constraints on its combustible products, covering everything from the carton design, to public usage and advertising of these devices, really began to hot up.

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Imperial Brands and its peers have invested vast sums into tobacco heating products and other so-called next generation technologies to mitigate the impact that the global war on smoking is having on their profits. Even though the maker of West and JPS had its titanic labels to thank for group volumes outperforming those of the broader industry between October and March, group volumes still sank 2.1% in the period according to its latest trading statement in May.

The same legislative action that is hammering demand for cigarettes, cigars and rolling tobacco threatens to spill over to crush the industry’s bright new products too.

Too risky

Already this week a report published by the American Chemical Society suggested that e-cigarettes release toxic chemicals which can alter the DNA composition of cells in the mouth and thus lead to cancer. This followed a study by the University of Birmingham in the UK, whose results released earlier in August showed that these devices can damage protective cells in the lungs which remove bacteria, dust particles and allergens.

There clearly remains a lot of fog around the issue of whether or not e-cigs and other similar technologies will, as Imperial Brands et al have longed hoped, replaced the lost revenues created by slumping demand for traditional products. Evidence is growing for regulators to clamp down hard on products like the firm’s recently-launched myblu e-cigarette.

Aside from these regulatory uncertainties, the likes of Philip Morris International and British American Tobacco have already witnessed demand for their tobacco heating products in the gigantic Japanese market contract in recent times. Should there be signs of contagion in other territories then investor appetite for Big Tobacco really could retrace sharply.

Dividends to disappoint?

City brokers certainly believe that Imperial Brands’ historic reputation as a reliable earnings grower is now a thing of the past, and a fractional bottom-line decline is forecast for the year to September. A 2% bounce-back is predicted for fiscal 2019, although clearly this is nothing to get excited about.

Additionally, these flaky forecasts, when combined with the FTSE 100 firm’s chunky net debt pile (of £13bn as of March) makes expectations of extreme dividend jumps — from 170.7p per share last year to 188p this year and 203.7p next year — look a little fragile as well.

Thus yields of 6.4% and 7% for fiscal 2018 and 2019 respectively aren’t enough to tempt me to invest. Given its poor long-term profits outlook I’m even prepared to overlook Imperial Brands’ low forward P/E ratio of 11 times. There are plenty of terrific big-yielders for Footsie investors to buy into today. Imperial Brands is not one of them.

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Royston Wild 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.

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