Imperial Brands shares are up 25% AND have an 8%+ dividend yield. I’m keen!

Imperial Brands shares could offer both sides of the coin for Jonathan Smith, who’s looking for an income and growth stock to add into his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Dividend yield

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »