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I’d buy Imperial Brands shares right now for its astonishing 10% yield

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Person smoking cigarette
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The Imperial Brands Group (LSE: IMB) share price has jumped around 6% today after new boss Stefan Bomhard said tobacco volumes and revenues are coming in ahead of expectations following a difficult year.

Today’s full-year results to 30 September came as welcome respite to investors in the FTSE 100 tobacco giant. Its shares have more than halved over the last four years while the dividend was slashed in May. Its future looks brighter as it pays down debt, and I would buy it for a balanced income-generating portfolio today.

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Shares in Imperial Brands are on the up after it reported a 0.8% rise in full-year adjusted group revenue to £7.98bn. Tobacco revenues rose 1.8% albeit with a weaker mix, while adjusted operating profit fell 4.8% to £3.52bn. Bomhard hailed the group’s “resilience” in a difficult year.

Still smoking

Today’s final results predicted low-to-mid single digit growth in organic adjusted operating profit for 2021, excluding the impact of the sale of its premium cigar business.

Imperial Brands shares tumbled last September as earnings flattened and US states cracked down on vaping, following deaths and illnesses. It also issued a profit warning in February. There was further bad news in May, when the board re-based its dividend, cutting the payout by a third to save cash amid flat tobacco sales and falling vaping revenues.

Investors won’t be complaining too loudly, given they still get a market-thrashing yield. Right now, Imperial Brands shares yields an incredible 10%, covered 1.8 times by earnings. I can’t see many better income shares around right now.

The pandemic hit duty free sales, following the collapse of international travel. It did offer one consolation, though, as tobacco smuggling fell. These two trends are likely to reverse, once we find a way out of the pandemic, although I do not expect travel to spring back that quickly.

Imperial Brands shares may stagnate

Anybody buying tobacco shares must accept this is a declining market, as smoking slowly but steadily dies out. There is still a long way to go and a lot of sticks will be sold in that time. Boosting market share helps, and the group grew its share in three of its top five markets last year. Imperial Brands should continue to generate plenty of cash to fund its dividend payouts. 

Future sales declines seems to be fully priced in, with the group’s shares now trading at just 5.3 times forward earnings. City analysts expect those earnings to rise by a steady 4% next year.

In another piece of good news for the group, adjusted net debt is falling. It now stands at £10.3bn, around £1bn lower than last year, helped by the disposal of its Premium Cigar arm. The strategic review in January should provide more clarity.

In a tough year for income seekers, shares in Imperial Brands look attractive. I would buy them for that mighty income, not so much for the growth.

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Harvey Jones 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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