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Is Imperial Brands’ 8% dividend yield safe?

Since peaking in the summer of 2016, Imperial Brands (LSE: IMB) has seen its share price fall by around 40% and the adjustment has driven up the forward-looking dividend yield for the current trading year to more than 8%. That looks temptingto me, but yields above 7% make me nervous because I fear they could be trimmed in the future.

However, the manufacturer and distributor of products for smokers (and for those who want to give up the habit) released a bullish-sounding trading update last month. It expects to deliver growth of at least 4% in revenue for the current trading year to September and earnings around 8% or more higher.

Investing for the future

The firm has been ploughing money into its next-generation myblu vaping product and the investment is paying off. The company said in the update that mybluhas gained a strongshare of the retail markets in Europe and Japan. Theres also been goodyear-on-year revenue growth in the USA, despite some constraints due to market uncertainty following statements by the US Food & Drug Administration.

Although next-generation products are important to the companys future, the firm still expects modestgrowth from its tobacco division. So, operationally, things seem to be ticking along nicely and the financial record reveals that the company has been generating plenty of cash useful for supporting the dividend payments.

Year to September

2013

2014

2015

2016

2017

2018

Operating cash flow per share

241p

261p

287p

330p

320p

323p

Net borrowings (m)

9,300

8,478

12,165

12,664

11,925

11,220

Id describe the incoming stream of cash flow as robust and consistent, which is ideal for supporting dividend payments to shareholders. On top of that, the firms net debt appears to be under control, which is important because interest on borrowings competes with dividends for the incoming cash flow.

We are not seeing runaway increases in borrowings in the table, although tobacco companies have held high levels of debt for as long as I can remember, which the generally stable cash inflow has justified.

Performing well with dividends

Imperial Brands has a decent record when it comes to paying dividends. Over the past five years, the payment has risen by more than 60%, which is a performance that could repeat going forward.

Year to September

2013

2014

2015

2016

2017

2018

Dividend per share

116.4p

128.1p

141p

155.2p

170.7p

187.8p

Normalised earnings per share

179p

183p

214p

94p

178p

150p

As well as ongoing trading, the company aims to enhance shareholder returns with its programme of divestments, which targets a number of value creation opportunities. And theres been a share buy-back operation going on for a long time.

I think Imperial Brands has plenty of opportunities that can lead to further growth and continuation of dividend payments to shareholders, and Id be happy to add the companys shares to an income portfolio.

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Femi Ogunshakin Managing Director
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