A 7.8% yield and growing! Is the Imperial Brands dividend a passive income bargain?
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Proudly owning blue-chip FTSE 100 shares like Imperial Manufacturers (LSE: IMB) generally is a profitable strategy to earn passive revenue. The Imperial Manufacturers dividend yield already stands at 7.8%. Which means that for each £100 I put in it at the moment I’d hopefully earn £7.80 annually in future.
Not solely is that yield near twice the FTSE 100 common, however it’s set to rise.
The tobacco producer at the moment (15 Could) introduced that it plans to extend its interim dividend by 4%. That follows a 4% enhance within the annual dividend final yr.
So, with a excessive dividend yield and a rising payout per share, might Imperial Manufacturers be a passive revenue discount for my portfolio?
Unfavourable long-term market developments
In a phrase, my reply isn’t any. However why?
Cigarette gross sales are in decline in lots of markets and that long-term sample appears to be like set to proceed. Certainly, income within the first half fell 2.3% yr on yr.
That’s regardless of the pricing energy supplied by the corporate’s model portfolio. Meaning it could possibly increase its promoting costs to attempt to counteract falling volumes. Certainly, within the newest six months, Imperial’s tobacco volumes fell 6.3% in comparison with the identical interval final yr.
However wait. Precisely the identical threat stalks British American Tobacco (LSE: BATS) – and I’ve a big shareholding in it. So why do I stay bullish on British American, but haven’t any plans to spend money on Imperial?
Quick-term technique belies long-term problem.
In a phrase: technique. British American has been scrambling to diversify away from cigarettes lately. They continue to be the lion’s share of its enterprise for now, however the firm has been targeted on rising its non-cigarette enterprise at pace.
In contrast, Imperial has doubled down on cigarettes lately.
It bought its premium cigars enterprise and reined in its non-cigarette ambitions in areas like vaping, as an alternative specializing in gaining market share in key cigarette markets.
That may work for now (though falling revenues and earnings per share within the first half might recommend in any other case). However I believe it units the corporate up poorly for the long term.
No dividend is ever assured
Why does that matter?
It might assist clarify why the share value has fallen 9% over the previous 5 years. Then once more, the British American share value has finished even worse in that interval, falling 16%.
But it surely additionally raises the query of whether or not the Imperial Manufacturers dividend could be maintained in years to return.
British American has raised its payout per share yearly for many years. However the Imperial Manufacturers dividend was slashed by a 3rd in 2020.
The newest outcomes present declines in income, gross sales quantity, working revenue and earnings per share. Internet debt grew 3% to £10.6bn. That doesn’t appear like the efficiency of a enterprise in robust form to me.
Imperial does proceed to be solidly worthwhile and owns a beautiful portfolio of manufacturers. Cigarette gross sales are falling however stay substantial.
However I’m uncomfortable with the danger that the Imperial Manufacturers dividend will probably be minimize once more sooner or later, because it was 4 years in the past. I’ve no plans to purchase.