Imperial Brands (LON:IMB) Is Paying Out A Larger Dividend Than Last Year

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 dividend yield to an attractive 6.7%, providing a nice boost to shareholder returns.

See our latest analysis for Imperial Brands

Imperial Brands' Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. 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 80.4% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 45% which brings it into quite a comfortable range.

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. Since 2012, the annual payment back then was £0.951, compared to the most recent full-year payment of £1.41. This works out to be a compound annual growth rate (CAGR) of approximately 4.0% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Dividend Growth May Be Hard To Achieve

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings has been rising at 2.8% per annum over the last five years, which admittedly is a bit slow. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. 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

In summary, while it's always good to see the dividend being raised, we don't think Imperial Brands' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for Imperial Brands that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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