The Motley Fool

This FTSE 100 stock yields 9%. Here’s why I think its dividend is safe

Image source: Getty Images.

Finding a high-yield FTSE 100 stock with a safe dividend has become increasingly difficult. After all, many of the index’s popular high yielders have cancelled or suspended their payouts this year. And some have indicated they won’t be paying anything in 2021 either.

However, there’s one big payer in the blue-chip index I think is a brilliant buy today. The company in question is tobacco group Imperial Brands (LSE: IMB). Here I’ll explain why I’m convinced its current 9% yield on a rebased dividend is safe. And also why I think it can grow its earnings and dividends in future.

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...

Still a top FTSE 100 stock for yield

Earlier this week, in its half-year results, IMB announced it’s reducing its dividend by 33.3%. A cut was widely anticipated, but the timing wasn’t. With new chief executive Stefan Bomhard not set to start until 1 July, the cut wasn’t expected until the full-year results in November.

I think it’s good IMB has given investors early clarity on where they stand. The dividend will enable the company “to accelerate debt repayment”. It will also “support a more flexible approach to capital allocation in the future”. In other words, it will provide the incoming chief executive with some firepower to invest in the business.

The rebased dividend implies a payout of 137.7p per share for IMB’s current financial year ending 30 September. At a share price of 1,535p, this gives the aforementioned handsome yield of 9%. Furthermore, the board said it will be “retaining a progressive dividend policy, growing annually from the rebased level”.

IMB is a FTSE 100 stock with robust dividend cover

Let’s look first at how well earnings support the current year’s dividend. And then at whether IMB is well positioned to grow the annual payout from the rebased level.

Unlike many companies, IMB is still giving guidance on its earnings expectations for the current year. The key components are:

  • Core earnings-per-share (EPS) decline of 2%
  • Plus a “low single-digit” negative impact from Covid-19-related factors
  • A 0.6% negative impact from intellectual property impairment
  • And 0.3% EPS dilution from the sale of its premium cigar business (expected to complete in July)

Assuming the low single-digit Covid-19 impact is 1% to 4%, we get an EPS decline of between 3.9% and 6.9%, with 5.4% at the mid-point. This translates to an EPS range of 254p to 262p, with 258p mid. Last year’s EPS was 273p.

The first thing I’d note is that the rebased dividend of 137.7p is covered a robust 1.8 to 1.9 times by EPS. The second thing is, the price-to-earnings (P/E) ratio is around 6.

The bargain-basement P/E suggests investors could enjoy strong capital gains in addition to juicy dividends. I’d suggest IMB need only deliver relatively modest earnings and dividend growth in future to attract a significant re-rating of its shares.

IMB has a lot to offer

As things stand, I’d expect IMB’s fiscal 2021 EPS to be ahead of the current year’s. This is because, among other things, I see scope for improvement in the performance of its next-generation products, and some increase in its duty-free and travel retail business.

Looking further ahead, I believe pricing power, cost efficiencies, and further potential industry consolidation mean tobacco companies still have a lot to offer investors. As such, I’d be happy to snap up IMB today for its dividend yield and capital gains potential.

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...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

G A Chester 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.

Our 6 'Best Buys Now' Shares

The renowned 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 enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.