I like buying and holding stocks in my portfolio for a long time. It takes away the need to follow closely what is going on with an individual company on a regular basis. It also offers me the opportunity to benefit from a company’s long-term performance. One UK share I already hold in my portfolio is yielding just over 8% right now. I would still consider buying more today and holding for a decade.
8% yielding UK share
The company in question is tobacco giant Imperial Brands (LSE: IMB).
Tobacco is an industry with highly cash generative properties. Smokers regularly buy cigarettes. Even price increases often only dent demand rather than hurting it badly. That gives tobacco companies pricing power. Such pricing power can help to offset falling sales as the number of smokers in many markets falls.
But cigarettes are cheap to make, so tobacco companies often throw off large free cash flows. That can enable them to fund meaty dividends. Imperial, for example, currently yields 8.1%. British rival British American Tobacco offers 6.9% and US giant Altria is yielding 7.1%.
Imperial is the highest yielding of these three. That is attractive to me. But why is Imperial the highest yielding of the trio?
Future prospects
I think Imperial’s higher yield reflects several investor concerns.
First, the company did cut its dividend sharply a couple of years ago. Last year its dividend growth was only 1%. So the prospects for dividend growth look fairly limited. I do not like dividend cuts but I think this painful medicine did make the dividend more sustainable for the company. Even with limited growth prospects, an 8% yield attracts me.
Another concern is the company’s focus on maximising market share in key cigarette markets rather than doubling down on next generation products such as vaping. This could go either way, I reckon. I think milking the cash cow of cigarettes for as long as Imperial can is good business sense. There is a risk that reducing its next gen plans could lead to revenue gaps in future. On the other hand, it means competitors like British American Tobacco can invest heavily in developing the market, much of which remains unprofitable. Once the economics are more attractive, Imperial could decide to increase its footprint in non-cigarette alternatives. Meanwhile, limiting its spend on building the next gen market frees up money that can be paid as dividends.
Why I would build and hold
Over the next decade I expect cigarette smoking rates to decline in most or all developed markets. That could hurt revenues.
But cigarette use has been in long-term decline for decades. Through its pricing power, a premium brand owner like Imperial is able to offset at least some of the profit impact. I expect Imperial to remain profitable for years and perhaps decades to come. I am concerned that falling profits could lead to more dividend cuts down the line. But a dividend in excess of 8% means there is some cushion for me as an investor even if there are more reductions in the payout. For now I would be happy to keep buying Imperial, tuck it in my ISA, and sit back as the passive income hopefully piles up for the coming 10 years.
