Over the past decade, Imperial Brands (LSE: IMB) has had a disappointing share price run. During that period, they have fallen 24%.
That is hardly the stuff of shareholder dreams. It means that, if I had invested £1,000 back then, the value of my shares now would be around £760.
Even from a shorter-term perspective, the Imperial Brands share price chart does not look attractive. The shares are down 17% over the past year — and 33% on a five-year timeframe.
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Strong dividend flows
Despite that price fall, holding Imperial Brands shares for the past 10 years would have seen my £1,000 investment grow to a value of around £1,624.
Why? One word: dividends.
Imperial was a strong dividend grower which, for the first part of the decade under review, raised its shareholder payout annually by 10%. Indeed, for years, that juicy yield and regular growth helped push up the price of Imperial Brands shares.
In the end, that level of dividend growth was not sustainable. In 2020, the business slashed its payout. It has since begun modestly raising its annual dividend again although, so far this year, they remain 31% below their 2019 level.
Where things might go from here
Past performance is not necessarily a guide to what will happen. And when it comes to Imperial Brands shares, I definitely think that is the case.
The glory years of double-digit annual dividend increases seem like a distant memory. The company’s approach to payouts is now far less ambitious.
For example, it has also slimmed its operations, selling its cigar business to help reduce debt. That means it has fewer avenues to earn money.
Meanwhile, cigarette volumes in many markets are declining. Imperial is trying to buy time by focusing on building share in key markets. Over the long term however, a likely decline in cigarette volumes could hurt revenues.
The effect of that for the sector overall could be mitigated by an increase in sales of non-cigarette tobacco products.
But Imperial has scaled back its non-tobacco ambitions for now. That could help save money in the short- to medium-term while the non-cigarette business model remains widely lossmaking. But it does raise the risk that cigarette revenues could fall in future without any alternative to replace them.
Better options elsewhere?
I continue to see massive dividend potential from the huge cash flows thrown off by the tobacco industry. Even after the 2020 cut, Imperial Brands shares currently yield 8.1%. That makes it one of the higher yielding FTSE 100 companies of any sector.
But it is still lower than the 9.3% yield offered by rival British American Tobacco. I think that competitor’s ambitious approach to building non-cigarette revenue streams is smart. It also has a more impressive portfolio of premium brands then Imperial, in my opinion, which gives it pricing power (although, in fairness, Imperial does also have some premium offerings including Davidoff cigarettes).
For now, although tobacco has a role in my portfolio, I have no plans to buy Imperial Brands shares.
