Why I’m bullish on this 4.7% yielder

This dividend stock appears to have a bright long-term future.

| 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.

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.

Tobacco is one of the few sectors which could record strong growth in 2017. Since the economic outlook is highly unclear thanks to Brexit and political uncertainty in the US, tobacco companies could become more in demand among investors. They offer stable business models, as well as growth potential from e-cigarettes. And since inflation is expected to move higher this year, the Imperial Brands (LSE: IMB) 4.7% yield may also prove extremely popular.

A popular industry

Sales of cigarettes are unlikely to be affected by potential economic challenges that may lie ahead. During recessions and economic booms, consumption of cigarettes changes very little. As such, Imperial Brands has a stable business model which has excellent defensive characteristics.

If share prices continue to be volatile, investors may seek out risk-off companies that offer more certain futures. And since Imperial Brands, as well as sector peer British American Tobacco (LSE: BATS), have scope to raise prices across the regions in which they operate, sales and profitability from tobacco products should rise over the medium term.

Growth potential

Alongside pricing power is growth potential within the e-cigarette space. While rising demand for e-cigarettes has moderated somewhat in recent years, they continue to offer double-digit growth for Imperial Brands. It owns one of the most popular e-cigarettes in the US, blu, and this could enable it to outperform the wider market when it comes to earnings growth in the medium term.

Of course, e-cigarettes could prove to be just the start of a period of intense innovation within the tobacco industry. Consumers across the globe are becoming increasingly health conscious and this could spur development of more products that offer lower health risks. Since Imperial Brands has a sound balance sheet and strong cash flow, it seems to have the financial firepower to invest in future growth and remain a major player in an evolving tobacco industry.

Dividend growth

As well as a 4.7% yield, Imperial Brands is forecast to raise dividends by 10% per annum over the next two years. That’s slightly ahead of British American Tobacco, which is forecast to raise them by 9.8% per year over the same time period. However, with Imperial Brands having a yield that’s 1% higher than its sector peer, it could prove to be the better buy over the long run. That’s especially the case since British American Tobacco will integrate Reynolds into its business, which could increase its risk profile slightly in the coming months.

With inflation set to rise to as much as 3% this year, Imperial Brands could become an extremely useful stock to own. It has a relatively high yield, strong dividend growth potential, bright earnings growth prospects and a stable business model. As such, now could be a good time to buy it and its shares look set to beat the wider index over the medium term.

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.

Peter Stephens owns shares of British American Tobacco and Imperial Brands. The Motley Fool UK has recommended Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

Here’s why I’m staying well clear of Rivian stock

Electric vehicles have excited investors for years now, but can be hit or miss. Here's why Gordon Best will be…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

A 6%+ yield but down 24%! Time for me to buy more of this hidden FTSE 250 gem?

After a rapid share price fall, this FTSE 250 stock's dividend yield has risen, leaving me wondering whether I should…

Read more »

View of Lake District. English countryside with fields in the foreground and a lake and hills behind.
Investing Articles

The United Utilities share price is recovering after mixed earnings report and sewage spill

Is a mild increase in revenue and slightly boosted dividend enough to save the United Utilities share price in light…

Read more »

Dividend Shares

Here’s why the Legal & General share price looks super attractive to me

Jon Smith flags up an important characteristic about the Legal & General share price that makes it appealing to him…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

To aim for £1,000 a month in passive income, should I buy growth shares or value shares?

Deciding which shares are the best to invest in is important when considering long-term passive income. However, there are several…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Here’s why I think AMD stock should be higher

The semiconductor sector has been on a tear lately, but here's why Gordon Best thinks AMD stock still has plenty…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s what investors need to know about the latest Warren Buffett stock

The mystery stock Warren Buffett has been buying has been disclosed to be Chubb – an above-average business at a…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

The Sage share price slides on half-year results: is it time to buy?

Sage’s share price has slipped on an uncertain outlook. But the company’s results suggest it’s still making good progress, says…

Read more »