Back in late 2016, I bought Imperial Brands (LSE: IMB) shares for my Stocks and Shares ISA. At the time, I saw IMB’s valuation and dividend yield as attractive.
It’s fair to say that my investment in the tobacco stock didn’t go to plan. Since I bought the shares, Imperial Brands’ share price has been stuck in a rotten downtrend. A few weeks back, I finally decided to cut my losses and sell my Imperial Brands shares.
Here, I’ll explain why I sold the stock and highlight the lessons I learnt from this poor investment.
Imperial Brands shares: I’ve sold
One of the reasons I first bought Imperial Brands shares was I thought the valuation was attractive. Today, I still think IMB’s valuation is attractive. Currently, the stock trades on a forward-looking P/E ratio of just 5.5.
The problem is, however, I’m struggling to see anything on the horizon that might result in a re-rating of the valuation. You see, since I bought the shares, sustainability has become far more of a focus in the investment management world. These days, nearly all institutional investors are turning to their attention to ESG investment strategies.
As a result, big investors are increasingly avoiding sectors such as Tobacco. This means that, going forward, tobacco stocks may not generate the same kind of interest from institutional investors they did in the past. This could potentially keep Imperial Brands’ share price depressed.
Another issue that concerns me is the amount of regulation that tobacco companies are currently facing. Of course, government regulation in the space is nothing new. However, recently, governments seem to be cracking down on tobacco and other related products harder.
For example, just recently in Spain, the Health Department announced it wants to raise tax on tobacco products in order to reduce cigarette consumption. Meanwhile, Australia is looking at banning the import of all e-cigarettes and refills containing nicotine.
These kinds of new regulations are going to continue to make life hard for sector companies such as Imperial Brands.
Finally, another reason I sold my Imperial Brands shares was that the company recently cut its dividend by 33.3%. Before this cut, I saw Imperial as an attractive dividend stock. The company had notched up an impressive dividend growth track record and the yield was attractive.
However, this dividend cut changes things for me. Once a company has cut once, you often see more cuts down the track. With a new CEO coming in, I wouldn’t be surprised if the company reduces its dividend again in the near future.
Lessons from this investment
Did I learn anything from losing money on Imperial Brands shares? Absolutely.
The key takeaway for me is, don’t buy a stock just because it’s cheap and offers a big dividend yield. Cheap stocks can get cheaper. And a high yield is often a sign the market doesn’t think it’s sustainable. I should have listened to what the market was saying.
Ultimately, this investment was a good reminder of the importance of focusing on a company’s growth prospects. Focusing on high-quality stocks with long-term growth potential is generally a more sensible strategy than buying stocks just because they’re cheap.
Edward Sheldon has no position in any 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.