Does a 9% dividend yield make Imperial Brands stock a good investment?

With a whopping 9% dividend yield, the bulk of tobacco Imperial marks (LSE: IMB) seems like a good buy for my income portfolio. There is only a handful of FTSE 100 companies that offer higher returns.

The Imperial Brands dividend advantage

And those who do are mostly in cyclical industries like mining and real estate, which have recently benefited from the boom in their respective industries. But I’m not sure they can continue to pay high dividends once the high growth phase is over. Imperial Brands, on the other hand, offers a much more reliable passive income stream.

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Smokers don’t quit easily, which means that whether the economy is booming or in a recession, the fortunes of tobacco companies are unlikely to waver much. And that translates into continuity in dividend payments. This is evident in the consistent dividends from Imperial brands over time. And big dividends, on top of that. For the past three years or so it has had a dividend yield of over 8% and for much of the past year it has actually been in double digits.

Falling stock price drives up dividend yield

There is, however, a problem with this FTSE 100 stock. Its stock price has been steadily declining. Over the past five years, it has more than halved, which also explains the rise in the dividend yield. The yield is nothing more than the amount of the dividend divided by the stock price. So when the stock price falls, the yield increases without any change in the amount of dividends.

Nonetheless, it may still be worth buying the stock, which I actually already have, if its price is likely to rise in the future. It’s possible. Imperial Brands’ share price has risen about 9% over the past year, albeit in spurts. And it’s still around 25% below its pre-pandemic levels.

Strong performance for Imperial Brands

In the meantime, his performances have only strengthened. For the six-month period ended March 30, 2021, it announced a 6% increase in revenue and a massive 244% increase in earnings per share (EPS) from the previous year. And that follows a strong performance for the full year 2020. Even in its business update released earlier today, the company expects to deliver on its forecast. And there is nothing in there really to encourage pessimism in the stock.

Why are investors disappointed?

Still, Imperial Brands’ stock price is down nearly 3.5% today, making it one of the biggest losers on the FTSE 100 today. This is in part the result of the overall market weakness, with the FTSE 100 index down 1.5% as of this writing. But it probably has something to do with its update as well.

There’s not much in it that makes me think he’s on a long-term growth path. Next Generation Products (NGP), which includes products such as vapes, are expected to post the same revenue levels in the second half of the year as in the first half of the year. As an investor, I would ideally like to see more growth in this segment, as traditional tobacco products are steadily losing market.

What I would do

For now, however, I continue to own the stock and will decide what to do with my shareholding after seeing its annual results in November.

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Manika Premsingh owns shares of Imperial Brands. The Motley Fool UK recommended Imperial Brands. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.

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