Tobacco shares have long offered dividend yields ahead of the market average. But heavy weakness in the Imperial Brands (LSE:IMB) share price means the gap has widened to eye-popping levels, based on current City forecasts.
Today the FTSE 100 stock carries a mighty 8% dividend yield for this financial year (to September 2023). That sails ahead of the 3.7% forward average for UK blue-chip shares.
And things get even better for next year when the company’s yield marches to 8.3%.
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But is Imperial Brands in good shape to deliver the dividends analysts are expecting? And should I buy the tobacco titan for my investment portfolio this August?
In good shape
Investor concerns might be rising over the profitability of the FTSE firm as cigarette demand falls. But City analysts don’t expect this to stop manufacturers from paying big dividends, at least over the next two years.
Imperial Brands — which lifted the full-year payout 1.5% in financial 2022, to 141.17p per share — is expected to raise it to 145.34p this year. Another hike to 151.73p is predicted for the following 12-month period.
It’s my view that the company is in good shape to meet these projections too. Anticipated dividends are covered between 1.9 times and 2 times over the next two financial years. Both figures provide a wide margin of safety.
The company’s decision to raise its interim dividend 1.5% in May underlines its commitment to returning cash to investors. It also provides an insight into the firm’s confidence in its balance sheet. A £1bn share buyback programme for this financial year highlights these qualities.
Are Imperial Brands shares a buy?
But does this mean I’ll buy Imperial Brands shares for passive income? The answer is no. Let me explain why.
I’m seeking shares that can pay solid (and growing) dividends over the long term. And I’m not sure that the tobacco business has what it takes to do this.
One concern I have is the high levels of debt it currently carries. This ticked up to £10.2bn as of March, up more than £480m year on year. The strain of having to pay this back — worsened by an era of higher interest rates increase — could have big implications for future dividends.
I’m also worried about how Imperial Brands shares will continue to deliver income as cigarette demand dries up. In the US, for example, stick sales have plummeted 70% since 1981, according to the Federal Trade Commission.
On top of this, sales of next-generation products (like the firm’s Pulze and iD heated tobacco lines) are also in danger. Rising health concerns mean that lawmakers are also trying to restrict how they are sold, marketed and used.
This all casts a long shadow over dividend payments beyond the next two years. It also means that Imperial Brands’ share price — which is down almost 40% in five years — is likely to continue sinking.
Right now I’d rather buy other FTSE 100 shares for dividend income.
