I usually buy a stock either for the hope of share price appreciation, or for pure dividend payouts. High-growth stocks that reinvest their profits back into the business often do so at the expense of paying out a dividend. Meanwhile, stalwarts that no longer offer strong growth often turn to higher income payouts to encourage investors to buy. Yet on some occasions, both outcomes can be achieved in one go. When looking at Imperial Brands (LSE: IMB) shares, this seems to be the case.
Share price growth
First, let’s run through the move higher for Imperial Brands shares over the past month. They’ve risen just over 25% and currently trade around 1,550p. The main driver behind this was the better than expected full-year results released in mid-November. The tobacco company reported operating profit up 24.3%, on revenues that improved by 3.1%. Although the operating profit figure was slightly inflated due to heavy impairments during 2019, it’s still a good performance. Imperial Brands shares kicked higher after the release.
What also impressed me was the cash conversion rate of 127%. This figure basically is a reflection on how well a business can turn profit into cash flow. After all, making an accounting profit isn’t great if none of this is actual cash banked at end of the year. Added to this was the CEO commenting that “we expect to deliver a stronger financial performance in 2021”. With this forecast, Imperial Brands shares could offer further growth for me as an investor next year.
The dividend per share was cut earlier this year by a third to 137.7p per share. This was a decision taken in order to reduce the circa £14bn debt it has, along with general Covid-19 caution. Given the share price trades around 1,550p, this still gives a dividend yield of 8.89%. This is very attractive to me. When I compare this to Cash ISA rates of around 1%, or even the FTSE 100 average yield of circa 3%, it’s strong.
The dividend yield changes every day depending on the share price. So if Imperial Brands shares rally further, the yield will fall. From that perspective, I’m keen to buy the stock sooner rather than later. Once I’ve bought the stock, my dividend yield is fixed, provided the proposed dividend per share stays the same.
Could Imperial Brands cut the dividend per share again? Potentially yes. However, consider two points from the above. First, the CEO is expecting to deliver a stronger performance in 2021. If this is the case, it’s unlikely a dividend would be cut further. Second, in May the dividend was only reduced, not cut completely. If the company was really struggling, it would have cut all payouts instead.
Imperial Brands shares: the best of both worlds?
For both income and growth investors like me, I think Imperial Brands is one to consider. It’s rare to find a business that can offer both sides of the coin. Especially during an uncertain period, a firm like Imperial Brands would complement my overall portfolio well, I feel.
jonathansmith1 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.