One of the best investment decisions I’ve ever made was buying shares in Imperial Brands PLC (LON: IMB) (LSE: IMB.L). That’s because they have risen in value and made me a tidy profit, but also because I feel optimistic about the company’s long term growth potential.
Sure, governments across the globe are getting tougher on smoking. Here in the UK, it was less than ten years ago that a ban was introduced on smoking in public areas and in recent years Australia has introduced plain packaging. And as we look further ahead, it seems likely that more countries will do the same and cigarette volumes could come under pressure as they have been doing in recent years.
That doesn’t bother me, though. A reason for that is the prospect of higher prices to offset volume declines. This may seem like a rather obvious strategy, but it is working well and because smokers are addicted to cigarettes, the scope for further price increases in future is very high. Imperial Brands should benefit from this.
Allied to this is the opportunity within reduced risk products (RRPs). These are apparently less harmful means of smokers gaining their nicotine fix, with e-cigarettes being the most popular RRP at the moment. With Imperial Brands having exposure to this space and having the financial firepower to buy up new and innovative RRP companies moving forward (as well as developing its own), the company appears to be well-placed to deliver further EPS growth in future.
One thing that regular readers will know about me is that I love my dividends. On this front Imperial Brands does not disappoint. It’s currently yielding 4.2%, but what really gets me excited as an investor is the potential for dividend growth. Not only are dividends likely to rise because of increasing profit, but Imperial Brands also seems to be in the process of raising its payout ratio, too.
While it has risen from 50% in 2011 to 66% this year, there seems to be scope for further increases. Therefore, dividends could rise faster than profit and provide shareholders like me with a great income in the long run.
The author holds shares in Imperial Brands at the time of writing.