Imperial Brands: High-Dividend Stock Yielding Over 9%

Income oriented investors oftentimes prefer if their dividend proceeds roll inconsistently throughout the year, instead of having months where income proceeds are very high, followed by months where dividend proceeds are very low. One way to achieve the goal of relatively consistent dividend streams is by purchasing stock of companies that make monthly dividend payments.

Another possibility is to purchase stocks where the payment schedules fit with each other, such as buying shares of a company that pays in Jan./Apr./Jul./Oct. and combining that with shares of two companies that have a payment schedule that is shifted by one month & two months, respectively.

We have constructed a portfolio designed to let investors receive dividends every month, and Imperial Brands (IMBBY) is one of the 3 stocks we have chosen for it, as the company offers a high dividend yield and a compelling total return outlook on top of that. In this article, we will take a closer look at Imperial Brands and its potential as an income investment.

Company Overview

Imperial Brands is a UK-based tobacco company that sells its products in more than 160 countries around the globe, including the US, where Imperial Tobacco is active through its division ITG Brands. Imperial Brands offers traditional tobacco products such as cigarettes to its customers, but the company also sells alternatives to cigarettes, such as its e-vapor products under the blu brand. Imperial Brands is, by market capitalization and by sales volumes, one of the smaller tobacco companies, as the company is valued at just $25 billion right now.

Imperial Brands Offers A Very High Dividend Yield

Over the last year, and especially the last couple of months, tobacco stocks got under pressure. This has resulted in declining valuations, while share price declines have also led to increases in the dividend yields of many tobacco stocks. Imperial Brands had offered an above-average dividend yield even before this sell-off, but thanks to the share price decline that the company’s stock has experienced, Imperial Brands offers a very high dividend yield of 9.3% right here.

In the past, Imperial Brands targeted annual dividend increases of 10%, but more recently management announced that dividend growth would likely be more muted going forward, as an increasing amount of the company’s cash flows would be used for debt reduction and for investments into alternative products such as vaping products. The company nevertheless expects to increase its dividend regularly going forward, and even without any future dividend increases Imperial Brands already quite high dividend yield would be enough to generate a meaningful dividend stream for investors.

Based on forecasted earnings-per-share of $3.66 during the current year, the current annual dividend of $2.48 is covered with a solid dividend payout ratio of 68%.

A strong dividend yield is not the only thing Imperial Brands has to offer, though. We believe that investors can expect considerable share price gains on top of that, due to a combination of earnings-per-share growth, which we estimate at 3% annually, and multiple expansion tailwinds. Imperial Brands’ shares trade for just 7.4 times this year’s expected earnings right now, which means that there is a lot of upside potential for Imperial Brands’ shares. We believe that a low double-digit valuation would be fair, which could result in cumulative share price gains of more than 50% over the coming five years.

Takeaway

Imperial Brands does offer a very attractive dividend yield to investors, and there is potential for meaningful share price appreciation over the coming years on top of that, through multiple expansion and rising earnings-per-share. Imperial Brands could, therefore, be an attractive addition to an income investor’s portfolio. When coupled with other stocks that pay attractive dividend yields in a shifted rhythm, a consistent monthly dividend stream could be created.