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Why I’d buy the Imperial Brands share to earn a passive income

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Most stocks have made gains since last year. But not Imperial Brands (LSE: IMB). The tobacco giant has the dubious distinction of being among the very few stocks whose share price have actually fallen from last year. 

To be fair, the fall is only 2.7% at present. But at a time when most other FTSE 100 stocks are sitting on high double-digit gains, just the fact that it has fallen is alarming enough. 

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Imperial brands posts healthy results

The catch though, is this. When I look at its latest results released earlier today, there does not appear enough reason to justify such weak share price performance. 

Consider this. 

  • Imperial Brands’ reported revenue increased by 6.1% for the half-year ending 31 March 2021 compared to the same period last year. 
  • Its reported operating profits are up a huge 77% from last year. This is largely due to one-off gains, that include the disposal of its premium cigar divisions. However, even if it is excluded, the operating profit is still up by 8.6%. 
  • It has reduced its net debt by 22% to £11m, which is an important metric in current times, I think. 
  • Perhaps most significantly, Imperial Brands has just increased its already high dividend by 1%.

The downside

The only downside I can see is in terms of its outlook. The company expects “low-mid single digit organic adjusted operating profit growth at constant currency”. This is lower growth than the 8.1% seen in the latest update. 

Structurally, as well, the tobacco industry is declining. Regulation on nicotine products has been tightening. Last month, tobacco stocks fell as news broke of the Biden administration’s plan to cut nicotine levels in cigarettes. 

While tobacco firms have started transitioning towards cleaner products, these have faced regulatory hurdles too. Besides this, next generation products (NGP), as Imperial Brands likes to call them, still have a small market compared to tobacco. 

In other words, the way ahead for the industry does look grey. So I can see some reason for the company’s sluggish share price. 

Undeniably big dividends

I would not give up on the share, though. Here is why.

I do not think that tobacco usage will get abandoned in a hurry. For proof, we need to look no further than Imperial Brands’ latest healthy results.

Further, what the share lacks in growth, it makes up for in income. According to AJ Bell data, the estimated forward dividend yield for 2021 is at 8.6%. This means that even with a small decline in share price, I can be a net gainer at these yield levels. 

My takeaway for the Imperial Brands share

Of course there is always a risk that the share price decline may be sharper than I had anticipated. But then all investing is based on reasonable assumptions. We can never know for sure what will become of any investments. Going by Imperial Brands’ results, its outlook, dividend yield, and share price trends so far, I am planning to buy it to earn passive income. 

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Manika Premsingh 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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