Is Imperial Brands’ 8% dividend yield safe?

Since peaking in the summer of 2016, Imperial Brands (LSE: IMB) has seen its share price fall by around 40% and the ‘adjustment’ has driven up the forward-looking dividend yield for the current trading year to more than 8%. That looks tempting to me, but yields above 7% make me nervous because I fear they could be trimmed in the future.

However, the manufacturer and distributor of products for smokers (and for those who want to give up the habit) released a bullish-sounding trading update last month. It expects to deliver growth of at least 4% in revenue for the current trading year to September and earnings around 8% or more higher.

Investing for the future

The firm has been ploughing money into its next-generation myblu vaping product and the investment is paying off. The company said in the update that myblu has gained a “strong” share of the retail markets in Europe and Japan. There’s also been “good” year-on-year revenue growth in the USA, “despite some constraints due to market uncertainty following statements by the US Food & Drug Administration.”

Although next-generation products are important to the company’s future, the firm still expects “modest” growth from its tobacco division. So, operationally, things seem to be ticking along nicely and the financial record reveals that the company has been generating plenty of cash useful for supporting the dividend payments.

I’d describe the incoming stream of cash flow as robust and consistent, which is ideal for supporting dividend payments to shareholders. On top of that, the firm’s net debt appears to be under control, which is important because interest on borrowings competes with dividends for the incoming cash flow.

We are not seeing runaway increases in borrowings in the table, although tobacco companies have held high levels of debt for as long as I can remember, which the generally stable cash inflow has justified.

Performing well with dividends

Imperial Brands has a decent record when it comes to paying dividends. Over the past five years, the payment has risen by more than 60%, which is a performance that could repeat going forward.

As well as ongoing trading, the company aims to enhance shareholder returns with its programme of divestments, which targets “a number of value creation opportunities.” And there’s been a share buy-back operation going on for a long time.

I think Imperial Brands has plenty of opportunities that can lead to further growth and continuation of dividend payments to shareholders, and I’d be happy to add the company’s shares to an income portfolio.