Imperial Brands PLC (LON:IMB) Passed Our Checks, And It's About To Pay A UK£0.4008 Dividend

It looks like Imperial Brands PLC (LON:IMB) is about to go ex-dividend in the next 4 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Imperial Brands' shares before the 21st of August in order to be eligible for the dividend, which will be paid on the 30th of September.

The company's next dividend payment will be UK£0.4008 per share, and in the last 12 months, the company paid a total of UK£1.53 per share. Based on the last year's worth of payments, Imperial Brands has a trailing yield of 5.0% on the current stock price of UK£30.50. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Imperial Brands is paying out an acceptable 62% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Imperial Brands generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

See our latest analysis for Imperial Brands

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Imperial Brands's earnings have been skyrocketing, up 25% per annum for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Imperial Brands could have strong prospects for future increases to the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Imperial Brands has increased its dividend at approximately 1.8% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Imperial Brands is keeping back more of its profits to grow the business.

The Bottom Line

Has Imperial Brands got what it takes to maintain its dividend payments? Imperial Brands's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. There's a lot to like about Imperial Brands, and we would prioritise taking a closer look at it.

While it's tempting to invest in Imperial Brands for the dividends alone, you should always be mindful of the risks involved. For example - Imperial Brands has 2 warning signs we think you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.