The FTSE 100‘s filled with high-yield income stocks for investors to browse through. And among the top 10 most generous payouts, Imperial Brands (LSE:IMB) stands out with its 7.3% yield.
When exploring these sorts of opportunities, investors need to be wary of potential traps. After all, there have been countless examples of attractive dividends evaporating in time, even within the FTSE 100. So are Imperial Brands’ dividends too good to be true? Or is this a terrific passive income opportunity?
The power of unpopularity
Tobacco companies aren’t everyone’s cup of tea. Cigarettes are known to cause significant harm to personal health in the long run. And following the rise of ESG investing, a lot of investors are actively avoiding owning shares in tobacco stocks like Imperial Brands.
As a result, that naturally opens the door to mis-pricing which is undeniably a factor why the dividends yield has consistently been abnormally high. But it’s not just about selling cigarettes that has kept investors at bay. There’s a genuine concern regarding the regulatory environment.
With Covid-19 making the world more health conscious, regulators across the UK, Europe, and the US have begun tightening their grip on tobacco companies even further. Restrictions have and continue to steadily increase surrounding these products, making them harder to sell. And in the long-term there’s a lot of uncertainty regarding the fate of these types of businesses.
Pivoting the portfolio
Management teams across the tobacco industry are not blind to this threat. Imperial Brands has long been taking action to steadily reduce its reliance on cigarettes for revenue. And the FTSE 100 business is actually making encouraging progress.
Its Next Generation Products (NGPs) line contains healthier alternatives to cigarettes, such as heated tobacco and vapes. Despite having only launched a few years ago, this segment now represents 7% of the group’s net sales. It’s the fastest growing segment in the business and in the six months to March, helped drive the group’s organic revenue growth to the highest level in over a decade.
Pairing this with further market share gains, adjusted operating profits were up by 2.8% over the same period on a constant currency basis. And this paved the way for an enticing 4% bump to dividends, along with even more buybacks.
A top stock to buy in 2024?
As previously mentioned, Imperial Brands isn’t the only firm looking to pivot its product portfolio. So seeing market share gains and double-digit growth from its NGPs is a welcome sight. Providing these trends continue, dividends aren’t likely to disappear any time soon, in my opinion.
Does that make it a top-notch stock to buy right now? Not necessarily. The regulatory environment is undoubtedly going to get stricter. And it’s not limited to just cigarettes. This uncertainty makes it difficult to forecast the outlook for this enterprise, not to mention the added risk of ramping competition.
Therefore, given there are other similar income opportunities elsewhere, Imperial Brands isn’t a stock I’m rushing to buy right now.
This post was originally published on Motley Fool
