The Imperial Brands share price comes with a 9% dividend yield. Should I buy?

Person smoking cigarette

The Imperial Brands (LSE: IMB) share price hasn’t really increased a lot in 2021. Since the beginning of the year the stock is down over 1%. But it has risen by almost 20% over the last 12 months.

The shares are dirt-cheap right now and trade on a price-to-earnings (P/E) ratio of six times. The Imperial Brands share price also comes with a whopping 9% dividend yield. As an income hungry investor, that’s very appealing. In fact, I’d buy the stock just for the dividend alone.

Interims

The FTSE 100 company reported its half-year results in May and the numbers were strong. Revenue increased by 6.1% to £15.6bn and reported operating profit improved by a stellar 77% to £1.6bn. But this wasn’t entirely due to improved performance. It was down to the disposal of its Premium Cigar Division as well the reduction in amortisation and impairments.

But if I look at organic adjusted operating profit this also improved by 8.6% to £1.6bn compared to last year. On a constant basis this increased by 8.1%. This gives me a better picture of the company’s profitability.

The firm has made a good start to implementing the new strategy it set in January. It’s a five-year plan, which includes becoming more consumer-centric. Of course, it’s still early days to assess the progress it has made, but at least it’s encouraging to see that it has made some headway.

Net debt

I like that the board is focused on reducing its net debt position. This was reduced by over £3bn to approximately £11bn on a 12-month basis. It’s worth noting here that last year the dividend was cut. So this as well as the disposal proceeds has helped the firm deleverage by a significant amount.

According to the company its net debt as a proportion of its profits or EBITDA is 2.6 times. Compare this figure to last year’s number of 3.5 times, it has reduced a lot. For me, it’s still high but the main thing is that the liabilities are reducing. 

Outlook

Imperial brands remains on track to deliver full-year results in line with its guidance. So at least things haven’t deteriorated, which is a positive sign.

Of course, there’s no guarantee it will remain on track to meet these targets. But it reckons it can deliver “low-mid single digit organic adjusted operating profit growth at constant currency”.

Risks

The stock does come with risks. The rules around the level of nicotine in tobacco products are tightening and I reckon this will only become stricter going forwards.

Increasing regulation and the costs that come with it could place pressure on profitability and the Imperial Brands share price. This may also impact the dividend as well.

Should I buy?

As I said, the 9% dividend yield is too hard to ignore. I consider Imperial Brands to be a ‘steady eddy’ stock. The firm generates cash flows to pay out the income. The company is ticking along and expects to deliver some growth this year. And with a cheap valuation, I’d consider buying the shares.

The post The Imperial Brands share price comes with a 9% dividend yield. Should I buy? appeared first on The Motley Fool UK.

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Nadia Yaqub 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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