7% dividend yield! Is this the best UK stock to buy in an ISA?

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With the arrival last month of a new tax year, I’ve been on the hunt for the best UK stocks I could buy for my Stocks and Shares ISA.

I’m particularly looking out for companies offering generous dividend payments as part of my long-term strategy to build passive income.

Thankfully, there’s a handful of companies listed on the London Stock Exchange boasting attractive dividend yields.

I’m singling out one in particular that I’d happily buy if I had some spare cash lying around.

A global company with trusted brands

Imperial Brands (LSE:IMB) is a British multinational tobacco company and the world’s fourth-largest, measured by market share.

The group focuses investment and resources around its five most important markets. These are the US, Germany, UK, Australia, and Spain, which represent more than 70% of combustible operating profit.

Thanks to its high-quality portfolio, Imperial Brands has been able to generate strong and sustainable cash flows. This has subsequently facilitated capital returns through a progressive dividend and share buybacks.

A steady financial performance

Last December, the group reported financial results for the year ended 30 September 2022.

On the whole, the results were nothing special, with net revenue actually declining by 0.7% to £3.26bn.

However, I was impressed by the group’s next generation products (NGP) net revenue, which was up 11% and was driven by market launches in all categories.

In addition, strong adjusted operating cash conversion of 102% enabled the balance sheet to reach the group’s target leverage of two times.

Imperial Brands expects 2023 first-half operating profit to be broadly flat, ignoring exchange rate movements. This reflects last year’s exit from Russia and investment in NGPs.

For now, the group’s dividend yield sits at a whopping 7%.

The downside to investing in Imperial Brands

However, one of the main drawbacks with tobacco stocks is that many institutional investors can’t, or won’t, invest in the sector.

Consequently, I reckon it’s unlikely that attitudes will change and valuations will recover in the short term.

On top of this, profit growth is hard to come by in an industry not known for its exciting prospects.

Nevertheless, if the group is successful in implementing its harm reduction strategies, Imperial Brand’s ESG credentials could improve nicely.

It also presents an opportunity for the group to cement its position in the newer and more exciting NGP market.

On track for the next phase of delivery

In January 2021, the group launched a five-year strategy providing a roadmap for business transformation.

Since then, Imperial Brands claims it has successfully built the foundations for future success. Consequently, the group is now on track to move to the next phase of delivery.

Pivotal to the success of the transformation is establishing a strong position in the NGP market. This is the home of products including heated tobacco and vapes.

To me, potential success in this area offers the group an important avenue for potential harm reduction as well as business growth.

For these reasons, I currently rank Imperial Brands as one of the best UK stocks I could buy for my ISA.

Thanks to a substantial dividend yield and future NGP prospects, I’d snap up some shares and aim to hold them for the long term. If only I had some cash to spare.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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