This FTSE 100 income machine yielding 5.5% keeps pumping out dividends
Five years ago, the Imperial Brands (LSE:IMB) dividend yield was above 9% as the share price traded for less than 1,500p.
Fast-forward to today, the FTSE 100 tobacco stock is trading at 3,219p. So investors who scooped up shares back then have made truly fabulous returns.
But what about today, with the forward-looking dividend yield now at 5.5%? Does Imperial Brands still look good value? Let’s take a closer look.
Successful turnaround stock
Back when cigarettes were still visible behind shop counters, Imperialâs brands were among the most recognisable on display. John Player Special, Lambert & Butler, Golden Virginia, and Rizla (tobacco rolling papers) stood out. It also owns Winston, Davidoff, and vape brand blu.Â
However, until CEO Stefan Bomhard joined in mid-2020, the company had underperformed, causing the share price to crash 70% in just four years.
But by cutting the dividend to a sustainable level, selling non-core assets to reduce debt, and focusing on five high-profit markets (US, UK, Australia, Germany, and Spain), Bomhard turned things around.
The streamlined operation boosted cash flows, underpinning share buybacks and rising dividends. During Bomhard’s five-year tenure, the share price jumped by more than 100%.
New boss
So the fact that this well-regarded CEO retired in October adds an element of uncertainty here, in my view. The original announcement in May was certainly a shock to the market, sending the share price down 7% on the day.
On the other hand, new CEO Lukas Paravicini was previously CFO, so this internal appointment represents continuity, not disruption.
Reassuringly, Bomhard will be available until May 2026 to offer support, if need be.
Solid results
Earlier this week, the cigarette maker reported a solid set of results for the year ended 30 September. Underlying revenue ticked up 4.1% to £8.3bn while operating profit grew 4.6% to almost £4bn. Adjusted earnings per share rose 9.1% at constant currency, boosted by a reduction in share count.
Price increases more than offset a decline in volumes, as has long been the case for tobacco firms. But sales of Imperial’s next generation products like vapes and heated tobacco jumped 13.7%.
Beyond vape label blu, the company owns heated tobacco device Pulze and nicotine pouch brand Zone. Growth here is encouraging, though sales in this unprofitable unit (£368m last year) are still dwarfed by cigarettes.
Good value?
Of course, the fact that overall cigarette volumes have been falling for years is the biggest risk here. But looking ahead, Imperial Brands is still targeting up to 5% annual growth in profits through to 2030. So this could prove to be a solid pick for income still.
Speaking of which, the full-year dividend rose 4.5% to 160p per share. And analysts see it rising 5% both this year and next, putting the forward yield at around 5.5%.
Meanwhile, the valuation looks quite cheap, with the forward price-to-earnings multiple at 8.6 for FY27. And this year’s £1.45bn share buyback has already commenced.
Given the continuity strategy, the stock’s unlikely to perform as strongly over the next five years. But through a combination of rising dividends, buybacks, and a reasonable starting valuation, I reckon Imperial Brands could still do well.
So, for investors who don’t rule out tobacco stocks on ethical grounds, I think this one’s worth considering for passive income.
The post This FTSE 100 income machine yielding 5.5% keeps pumping out dividends appeared first on The Motley Fool UK.
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Ben McPoland has no position in any of the shares mentioned. 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.
