On paper, Tobacco giant Imperial Brands (LSE:IMB) looks like a surefire winner with a dividend of 11.5% outpacing almost every other FTSE 100 share.
After all, buy a couple of shares with double-digit yields for your portfolio and you’ll grow your money quickly in just a few short years.
But when you get dividend pledges at this level there are warning lights flashing all over the map, and I say there’s a much better buy to make you richer.
When you’re investing for a happier future, you don’t want to be caught out by a share that won’t do what it promises.
Remember Centrica? The British Gas owner has seen its share price plummet 66% over the last three years. An interim dividend dropped 58% from 3.6p to just 1.5p in 2019 and full year dividends will sink from 12p to 5p. That’s a grinding loss for any unwary investor expecting to cash in on Centrica’s headline 16% yield.
Imperial broke with 20 years of tradition in 2019 to say it would no longer guarantee dividend hikes of 10% a year. Instead, outgoing CEO Alison Cooper said dividends would rise in line with profit growth.
But full-year results out on 5 November showed profits falling, not rising, as the company grappled with shrinking tobacco sales and a regulatory nightmare over e-cigarette products.
A September profit warning gave further cause for concern. American sales “deteriorated considerably with increased regulatory uncertainty“, Cooper said. Seven US states have now banned vaping all together.
If your boss paid you £50,000 one year but ran out of money and said you could only have £10,000 the next, you wouldn’t be too happy.
Similarly, Imperial hasn’t actually made enough money to pay out an 11.5% dividend. Dividend cover right now stands at 0.92 and paying out 11.5% to shareholders would put a serious black hole in its finances. This is capital it desperately needs to invest to cover the losses it stands to make from the failing vaping sector.
The company is also heavily leveraged with a net gearing (debt-to-assets ratio) of over 200%. That means further pressure that will cut into profits going forward.
Get richer here
I own Aviva (LSE:AV) and it is one of my best performers.
The insurer is a cash-generating machine and dividends keep stacking higher year over year, from 18.1p a share in 2014 to 30p in 2018. An interim dividend of 9.5p puts 2019 on track to be another record payout.
Despite a plump 6% share price rise in the last month alone, with a trailing price-to-earnings ratio of 11.3, the shares are still pretty cheap, and you’ll bag a 7% dividend that I reckon will clip higher again and again.
Maurice Tulloch is one of my favourite CEOs, not least because he reported a strong financial position in half-year results with “a capital surplus of £11.8 billion“. £2.3 billion in cash reported in August was also up from £1.9 billion in February.
There’s really no point laying down your hard-earned money with the expectation of getting a market-smashing payout, only to see levels slashed. If you’re going to get richer over time you need increasing dividends well covered by earnings. In my opinion Imperial Brands won’t offer you that.
Instead, take a look at companies that are growing their earnings and profits and can actually pay you back for the faith you’ve invested in them.
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Tom owns shares in Aviva, but has no position in the other shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.
Motley Fool UK 2019