Imagine this: you add an item to your Amazon wish-list and, just before you buy it, the price goes down. You’d be pleased, right? So why don’t people react the same way when, for example, FTSE 100 share prices go down instead of up? We all agree that lower prices are better for buyers, yes?
A high income from a FTSE 100 pillar
If you aim to be a net buyer of shares for a while, then falling share prices give you an opportunity. They allow you to buy even more shares in, say, your favourite FTSE 100 firms. Take multinational tobacco company and FTSE 100 stalwart Imperial Brands (LSE: IMB), which makes JPS, Gauloises, and Winston cigarettes, as well as tobacco, cigars, and rolling papers.
Imperial was born in Bristol in 1901 (the year Queen Victoria died) and is almost 120 years old. Of course, as Imperial sells an addictive product that eventually kills consumers, this share is firmly off the menu if you’re following an ethical investing strategy.
The numbers behind this £14.3bn giant are staggering. It has around 32,000 employees, operates 50 factories, and sells its products in more than 160 countries. In its latest financial year, Imperial’s revenues of over £31.6bn produced operating income of almost £2.2bn.
By market share, Imperial is the world’s fourth-largest cigarette manufacturer, rolling out a staggering third of a trillion fags each year. That’s more than 40 cigarettes per person on the planet!
Lower share price? Or higher dividend yield?
On 1 April, I urged investors to buy shares in Imperial at 1,540p for their double-digit dividend yield. As I said at the time, “Its current dividend yield is a whopping 13.4%. Even were this halved to 6.7%, it would still be attractive to income investors”.
On 15 May, I repeated my advice to buy Imperial shares. Here’s the gist of what I wrote three weeks ago: “Imperial Brands…share price [is] 1,635p…[for] an incredibly high yearly dividend of around 13%. And remember that’s a yearly payout in good, old-fashioned cash. Even were it to halve to 6.5% a year, it would still beat most income-generating assets hands down”.
Four days later, this Imperial duly obliged, announcing on 19 May that it was cutting its half-year dividend by exactly a third, reducing it to 41.7p from 62.56p a share. That said, half-year revenues did rise 2% year on year, so Imperial’s sales are still slowly growing. Imperial now has £14.1bn of net (cheap) debt, which it plans to start paying down with these dividend savings.
For the third time, I argue that, in a world of zero and negative interest rates, this share looks attractive for income-seeking investors. Imperial is a simple, global FTSE 100 business whose shares at 1,503p offer a forward dividend yield of nearly 9.2% a year. Even better, its implied full-year dividend of 137.7p per share should be well-covered by earnings per share as high as 260p.
Finally, this was Imperial’s first dividend cut in 24 years, so I’m expecting its payout to rise gradually from here on. With Imperial’s share price down a third from its 2019–20 high of 2,256p, I believe now is a ‘smoking’ time to buy!
Cliffdarcy 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.