Up 68%, is this top UK dividend share still a bargain buy?
Top FTSE 100 dividend share Imperial Brands (LSE: IMB) has risen by almost 70% over the last year.
The UK’s second-largest tobacco group went through a difficult patch a few years ago but is now firing on all cylinders. Last year, the business generated £2.4bn of surplus cash – enough to support a £1.25bn share buyback and a 5% dividend increase.
All of this good news comes at a price, of course. Imperial shares aren’t as cheap as they were 12 months ago. This means that as a shareholder, I need to decide whether to buy more, sell, or simply hold onto my shares.
A safer dividend?
In May 2024, Imperial Brands shares boasted a chunky forecast dividend yield of 8.3%.
One year later, the stock’s surging share price means this payout yield has fallen to 5.3%. That’s still well above the FTSE 100 average of around 3.6%. But it does mean that this tobacco stock is no longer one of the highest-yielding shares on the market.
As an income investor, I’m looking for high yield. But I’m also interested in safe dividends. In my view, Imperial’s dividend could actually be safer than it was a year ago.
Falling debt levels mean the company isn’t having to spend so much cash on interest payments. This year’s forecast payout is covered twice by expected earnings, up from 1.7 times in 2023.
Meanwhile, the high level of share buybacks has allowed CEO Stefan Bomhard to keep the total cost of the dividend the same, while increasing the payout per share.
I think the payout looks pretty safe. If I’m right, it might make sense to accept a lower yield.
Should I be worried?
Some investors choose to avoid tobacco stocks for ethical reasons. That includes many big fund managers, whose ownership might otherwise provide more stability for the stock.
There’s also the risk that the tobacco business will eventually shrink to a level that’s not sustainable. Imperial’s cigarette volumes fell by 4% last year, continuing a long-term trend. Sales growth was driven by price increases alone.
Sales of alternative products such as vapes also represent a risk. They may be more attractive for younger smokers than cigarettes, but I suspect they will always be less profitable due to much higher levels of competition.
What I’m doing
I probably should think about buying more Imperial shares. Earnings are expected to continue rising, the dividend looks safe for now and I think the business is under strong management.
The shares don’t look too expensive either. A 2025 forecast price-to-earnings ratio of nine and 5.3% dividend yield mean Imperial is still much cheaper than the average FTSE 100 share.
However, I can’t ignore the fact that this isn’t really a growing business. Regulatory risks are also higher than I’d like. This is especially true for Imperial. The group sells most of its cigarettes in heavily regulated developed markets, such as the UK and Germany.
On balance, I think the current price is reasonable, but not cheap enough to persuade me to buy. I’m going to continue holding my Imperial shares for now, but I’ve no plans to buy more.
The post Up 68%, is this top UK dividend share still a bargain buy? appeared first on The Motley Fool UK.
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More reading
- £10,000 invested in Imperial Brands shares 10 years ago is now worth…
- Is it wrong for me to buy these FTSE 100 tobacco stocks?
- Up 73% in one year, is this the best value stock in the FTSE 100?
- 2 UK dividend shares that look dirt cheap right now
Roland Head has positions in Imperial Brands Plc. The Motley Fool UK has recommended Imperial Brands Plc. 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.
