When looking for high-yield dividend stocks, investors could do worse than the 9% that Imperial Brands (LSE:IMB) shares offer. The stock hasn’t exactly been the best performer in recent years. And over the last 12 months, the shares are only up by a lacklustre 5%. But could that change in 2022? And is the high yield too good to be true? Let’s take a closer look at this business to see whether I should be considering it for my portfolio.
Encouraging signs of progress
Despite the efforts of governments to discourage smoking, it remains a habit for many people globally. That’s hardly surprising given the addictive nature of the product. And it’s something that this dividend stock has been able to capitalise on.
While the amount of tobacco sold each year is falling, the company has maintained its revenue stream through price hikes. Looking at the latest set of results published earlier this week, tobacco prices were raised by 4.4% to offset a 2.9% decline in volumes. Overall, revenue came in flat. But thanks to efficiency improvements, operating profits were up by just over 15%. And that, in turn, enabled management to start deleveraging the firm’s balance sheet with net debt falling from £11.1bn to £9.4bn.
Meanwhile, the company is switching strategy in 2022 and has already started pulling out of underperforming markets. This did lead to a 3.9% drop in sales of its heated tobacco and vaporisation devices. However, these next-generation products (NGPs) remain a crucial part of management’s future growth plans. And despite the fall in sales, losses from this segment were cut in half.
Needless to say, this is all quite positive. And when combining increased profitability with lower debt levels, a high 9% dividend yield certainly sounds more sustainable. That’s a good trait for any dividend stock to have, but there are still some risks to consider.
Taking a step back
The tobacco industry has a solid reputation for retaining its customers. But its ability to attract new ones in recent years has started dwindling. With higher taxes being levied and health concerns becoming widespread knowledge, this is hardly surprising.
Management is fully aware of this growing problem, which is why the new strategy places particular emphasis on expanding its NGPs that have significantly less health impact. However, these largely remain unproven, with product trials still under way around the world.
The early results are reassuring. But whether they will eventually reach the same volume of sales as its cigarettes in the past, nobody knows. If NGPs fail to meet performance expectations in the long run, then dividends could end up getting cut.
A dividend stock worth owning?
It’s encouraging to see management realise the predicament and take action to ensure long-term value creation for its shareholders. However, while the early results look promising, it’s too early to tell whether the new strategy is working.
Personally, I think the high dividend yield can be sustained in the near term. Imperial Brands does look like an enticing dividend stock to own in 2022. Having said that, it’s not one I intend to add to my portfolio until more data comes out regarding the progress made with its NGPs.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.
This post was originally published on Motley Fool
