Imperial Brands (LON:IMB) Has Announced That It Will Be Increasing Its Dividend To £0.4932

Imperial Brands PLC (LON:IMB) has announced that it will be increasing its dividend from last year's comparable payment on the 31st of March to £0.4932. This will take the annual payment to 6.9% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for Imperial Brands

Imperial Brands' Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Imperial Brands' dividend made up quite a large proportion of earnings but only 44% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Looking forward, earnings per share is forecast to rise by 78.7% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 45%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of £1.06 in 2013 to the most recent total annual payment of £1.41. This implies that the company grew its distributions at a yearly rate of about 2.9% over that duration. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

Imperial Brands May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Earnings have grown at around 2.9% a year for the past five years, which isn't massive but still better than seeing them shrink. Slow growth and a high payout ratio could mean that Imperial Brands has maxed out the amount that it has been able to pay to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 3 warning signs for Imperial Brands that investors should take into consideration. Is Imperial Brands not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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