It’s not often a FTSE 100 stock offers a safe-looking 9% dividend yield. But that’s what I’m talking about today. Imperial Brands (LSE: IMB) shares rose by nearly 10% last week after the tobacco firm’s 2019/20 results appeared to show solid support for its dividend.
For a passive income investor like me, a reliable 9% yield is too good to ignore. I already own Imperial shares, so I was keen to see what new chief executive Stefan Bomhard would have to say. Should I keep buying?
Let’s start with the good news
2020 has been a relatively good year for tobacco sales. According to Imperial, home working has provided smokers “with more occasions to consume” and reduced switching to vapes.
As a result, Imperial’s net revenue (sales excluding taxes) rose by 0.8% to £7,985m during the year to 30 September.
There was also good news on debt reduction — Imperial recently completed the sale of its premium cigar business for €1.1bn. This money will be used to reduce the group’s hefty £10,299m net debt.
What could possibly go wrong?
Even though sales rose, profits fell. The company said the mix of brands and geographic markets which saw growth last year was “sub-optimal”. Covid-related costs also affected profit margins.
All of this meant that despite higher sales, Imperial’s adjusted operating profit fell by 4.8% to £3,527m last year.
However, the real risk for buyers of Imperial Brands’ shares is that Bomhard will not be able to find a way to arrest a long-term decline in sales volumes. It’s no secret that the tobacco market is in decline in most developed markets. These are where Imperial makes most of its sales — western Europe and the USA are the group’s largest markets.
The company’s tobacco volumes fell by 2.1% last year. The revenue gains I mentioned above came from a 3.9% increase in average pricing — a trick the tobacco industry has been using for many years.
So far, Imperial’s venture into next-generation products like vapes hasn’t been wildly successful. Sales of these products fell by 9% during the second half of the year. This part of the business is expected to report a loss next year too.
Imperial Brands shares: my verdict
Investing in a sector that’s in long-term decline always carries certain risks. My top priority is to make sure that if I buy more IMB shares, I don’t pay too much.
Fortunately, I don’t think that’s a problem just yet, despite recent share price gains. As I write, Imperial Brands shares trade on six times earnings and offer a 9% dividend yield. Having reviewed the firm’s latest numbers, I’m confident this payout should be safe for the foreseeable future.
In my view, Imperial shares are cheap enough to reflect the risks faced by shareholders. I plan to continue holding this stock in my passive income portfolio.