Down 15%, is this LSE stock a no-brainer buy for high passive income?

This LSE stock looks a passive income winner to me, with solid H1 results, an 8%+ yield, and trading at a 15% discount to its 2023 high.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businesswoman calculating finances in an office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I look at three key factors when choosing companies to generate significant passive income. First comes dividend yield, then dividend cover, and finally business fundamentals. I also like a stock that is trading at a significant discount to its recent high.

Imperial Brands (LSE: IMB) ticks all three key factor boxes for me. And it is also trading at 15% less than its 27 February high this year.

Created with Highcharts 11.4.3Imperial Brands Plc PriceZoom1M3M6MYTD1Y5Y10YALL1 Jan 202129 Aug 2023Zoom ▾Jan '21May '21Sep '21Jan '22May '22Sep '22Jan '23May '23Jan '21Jan '21Jul '21Jul '21Jan '22Jan '22Jul '22Jul '22Jan '23Jan '23Jul '23Jul '23www.fool.co.uk

From a valuation perspective, it has a P/E ratio of 9.87 that has been stable for some time. This compares to a current average trailing P/E ratio of just under 11 for FTSE 100 firms in general.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

This means I am less likely to lose passive income gains on adverse share price movements. The stock might even gain over time, supported by the £1bn share buyback to be completed this year.

Good business fundamentals

In its H1 results, the company reported adjusted operating profit up 0.8% to £1.6bn, on a revenue rise of 0.3%.

The bulk of this came from a 19.8% increase in the net revenue of its next-generation products (NGP). These include vaping and other oral nicotine items.

At the same time, volumes of its traditional tobacco products dropped 12.7%, driven by its exit from Russia.

These numbers reflect the company’s strategic plan launched in 2021 to counteract the broad-based decline in smoking. This factor remains a risk for the shares, as does further legal action over health damage done by its products.

The new five-year plan sees its tobacco business focus on five markets — the US, Germany, UK, Australia, and Spain. These represent more than 70% of its tobacco operating profit. For its NGP products, it is beefing up investment, especially in Europe.

Star shareholder rewards

Last year, the company paid a total of 141.17p for a yield of 7.6%. In 2021, it paid 139.08p (8.9%), and in 2020 it was 137.71p (10.1%).

Important as well for me was that each of these dividends was well covered. A cover ratio above 2 is considered good, while below 1.5 may indicate the risk of a potential dividend cut. For Imperial Brands, the ratios were 1.88 in 2022, 1.78 in 2021, and 1.85 in 2020 – all fine.

In its H1 2023 results, it increased the second interim dividend by 1.5%, as it had the first, to 21.59p.

If it also increased the last two dividends by 1.5%, the total payment would be 143.28p. Based on the current share price of £17.71, this would yield 8.1%.

Serious passive income generator

Given this, a £10,000 investment now would make me £810 per year. Over 10 years, I could make £8,100 in passive income, on top of my £10,000 investment.

This return would not include further gains from any reinvestment of dividends or share price appreciation. Of course, it would also not account for any tax liabilities or share price falls.

I already have other holdings that offer good dividend yields and share price growth prospects. If I did not, I would buy these shares now for two key reasons.

First and foremost, the high passive income I could make. Second, the possibility of at least some of the recent share price declines being recouped over time.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins 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.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »