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A 7.8% yield and growing! Is Imperial Brands Dividend a Passive Income Deal?

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Blue chip owner FTSE 100 Shares such as Imperial Brands (LSE: IMB) can be a lucrative way to earn passive income. Imperial Brands’ dividend yield already stands at 7.8%. This means that the £100 I put in today will hopefully earn £7.80 per year in the future.

Not only is the yield close to double the FTSE 100 average, it is set to rise.

The tobacco maker announced today (May 15) that it plans to increase its interim profit by 4%. This follows a 4% increase in annual profit last year.

So, with a high dividend yield and growing payout per share, could Imperial Brands be a passive income deal for my portfolio?

In a word, my answer is no. but why?

Cigarette sales are declining in many markets and this long-term pattern appears to be continuing. In fact, revenue fell 2.3 percent year-over-year in the first half.

This is despite the pricing power offered by the company’s brand portfolio. This means it can raise its selling prices to try and counter falling volumes. In fact, in the most recent six months, Imperial’s tobacco volume fell 6.3 percent compared to the same period last year.

But wait. Exactly the same danger stalks British American Tobacco (LSE: BATS) – and I have a big part in it. So why do I remain happy with British American, yet have no plans to invest in Imperial?

A short-term strategy belies a long-term challenge.

In a word: Strategy. British Americans have been trying to stay away from cigarettes in recent years. They still form the bulk of its business, but the company has focused on rapidly growing its non-cigarette business.

In contrast, Imperial has doubled down on cigarettes in recent years.

It sold its premium cigar business and reined in its non-cigarette ambitions in areas such as vaping, instead focusing on gaining market share in key cigarette markets.

It might just work (though falling revenue and earnings per share in the first half might suggest otherwise). But I think it sets the company up badly for the long term.

Profits are never guaranteed.

Why does it matter?

This may help explain why the share price has fallen 9% over the past five years. Then again, British American shares fared even worse over the period, falling 16 percent.

But it also raises the question of whether Imperial Brands’ profitability can be sustained in the coming years.

British American has increased its payout per share annually for decades. But Imperial Brands’ profits were cut by a third in 2020.

The latest results show a decline in revenue, sales volume, operating profit and earnings per share. Net debt rose 3% to £10.6bn. That doesn’t sound like a solid business performance to me.

Imperial is consistently profitable and owns an attractive portfolio of brands. Cigarette sales are falling but holding steady.

But I am uneasy about the risk that the Imperial Brands dividend will be cut again in the future, as it was four years ago. I have no plans to buy.

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