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Why I think this FTSE 100 stock with an 11% dividend yield should be on your watch list

Pi De Jonge
Stack of new bank notes

If you are an income investor, the FTSE 100 can be a good place to search for your next big deal. Imperial Brands (LSE: IMB), formerly Imperial Tobacco, is a hot pick for its dividend yield.

A high dividend yield

Global sales of tobacco have been slowing over the last few years, and the risk of it becoming completely outlawed is now ever-present. Still, Imperial Brands, the British tobacco giant, seems undeterred in generating real value, especially for its income investors.

Shareholders have been generously rewarded, with the company having disbursed approximately £10 billion in dividend payments over the past 10 years. In fact, as of December 2019, its annual dividend yield stood at roughly 11%.

Over the last two years, Imperial has had a poor run that saw its share price almost halved from over £31. However, it seems the stock is picking its pieces back again, steadily making gains over the last month.

New revenue sources in face of stalling tobacco sales

Imperial Brands has done a good job of expanding its revenue sources. Using a newly adopted strategy of sustainable and profitable growth, the company has since ventured into vaping and heated tobacco products and the cannabis business, which collectively tags Next Generation Products (NGP).

Imperial followed its 2018 investment in the UK biotech firm Oxford Cannabinoid Technologies (OCT) with a £75 million deal it struck with the pot producer, Auxly Cannabis Group, in July 2019. Both are expected to help diversification efforts by furnishing it with further options for future growth.

Ever-present regulatory uncertainties

In spite of the efforts to explore alternatives to boost growth, Imperial’s overall operations are still susceptible to regulatory complexities and uncertainties. In fact, in September 2019, Walmart announced it would stop selling vaping products.

That decision of the world’s largest retailer came on the heels of a mysterious vaping-associated lung disease that had resulted in the death of at least eight people in prior weeks. Consequently, Imperial had to revise its projections for the 2019 fiscal year.

Still, for the year, the company grew its NGP revenues by roughly 50% in spite of the regulatory whirlwind. Overall, revenue growth recorded across all operations was about 2%. That is nothing short of impressive for a company that has been facing declining demand for its core product.

For the next 12 months, we can only fold our arms and see how Imperial’s new business adventures pan out. However, one thing is highly probable: given its impressive 10-year average positive cash-flow of £2.4 billion,  Imperial should always be able to pay its income investors their dues.

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Pi De Jonge has no position in any of the 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 2020