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Collecting passive income from stocks and shares is easy.
Publicly traded companies typically allocate part of their profits to shareholder dividends. And the best companies have been reliable payers for years.
However, even stocks with stable dividends can have a downside. And an example of this is the supplier of smoking products. imperial marks (LSE: IMB).
A declining valuation
The problem for investors is the disappointing medium-term performance of the share price since 2016.
An investment made at that time would have been poor despite the passive income stream from dividends.
However, the financial and commercial performance of the business has been stable while that long downward trend developed. Therefore, the main reason for the decline has been a wild downgrade in valuation.
With the share price near 1,780p, Imperial Brands looks cheap now. The expected dividend yield for the business year to September 2024 is above 8%. And the projected earnings multiple for that year is just below six.
The company can make a decent long-term dividend investment from where it is now. But the business will face some obstacles and risks in the coming years.
For example, the tobacco industry is in long-term decline. In the recent full-year results report, CEO Stefan Bomhard stated that the company has “offset structural volume declines with strong pricing in all key markets.”
To me, that sounds like a short-term solution to boost profits. Sales prices cannot continue to rise forever beyond the rate of inflation. It seems likely that sales volumes will decline further if prices become too high for customers to afford.
Buybacks and dividends
However, the company has also been gaining market share with its cigarettes. Over the long term, such gains in a declining overall market are a bit like riding a downward escalator. But the advances are important because traditional smoking products still account for about 70% of operating profits.
Meanwhile, the company is making good progress selling its next-generation products, such as vaporizers, heated tobacco and oral nicotine. One constant uncertainty, however, is the regulatory scrutiny the company attracts for all product categories, including newer ones.
At any time, governments can pass laws to make it harder for people to smoke and vape. And Imperial Brands’ prospects could be hurt. If that happens, the company’s large debt could become problematic.
The company believes it can improve shareholder returns in the coming years by using its steady cash flow to buy back its shares and increase dividends. But it’s worth noting that it cut the dividend during the pandemic and marked it down.
Since then, the payout to shareholders has been increasing a little each year. However, any company’s dividend history is a good indicator of a company’s long-term health. Therefore, the downward adjustment is a cause for caution.
Despite my concerns, the directors issued an optimistic outlook statement with full-year results. And the company is cheaper now than it has been for years. Cash flow seems to be holding up well. And City analysts expect dividend increases in the future.
Ultimately, I think the stock is worth the additional research time of passive investors looking for income.