- If other investors all shun a stock for moral reasons that makes it cheaper for us
- Sin stocks have long been happy hunting grounds for those looking for yield and income
- Imperial could also benefit from a rerating
Imperial Brands PLC (LON: IMB) currently yields 8.6%, which when FTSE 100 as a whole on a prospective 4% is an attractive rate for income seekers. The problem, of course, is that Imperial makes cigarettes, that evil that many will not invest in. That problem is the reason for the yield as well. So, the decision has to be made, invest on moral grounds or go for the income?
That many do go for the moral view is exactly why the Imperial yield is so high. This has long been true of many sin stocks. For the capital value – the valuation – of a share like Imperial is the number of people willing to buy it at a certain price. So, if some number of folk decide not to buy on moral grounds then that price will be lower than otherwise. The greater the number who shun it the lower the price will be. That should be obvious.
The expansion of such moral investing – now expanding into ESG concerns as well as just booze and tabs – means that the discount to some objective valuation of the income stream increases. Which is how we end up with that 8.6% yield.
High yields though can mean the “dividend trap”. That is, the company is paying out enough that it’s damaging the capital base for the future. So, while the income will arrive now the share price will decline to reflect it. This does indeed happen at times but it’s not likely with Imperial.
There are other useful attributes here too. Those who do smoke tend to really smoke – in the rich world those who will be dissuaded by price largely already are dissuaded. This gives significant protection against inflation. If we think that inflation isn’t just going to be transient then we would like to be invested in businesses that can raise their prices to keep up with it. Just that – addiction if you like – strong desire to keep smoking is exactly what gives tobacco companies their strength. That, dependent upon inflation expectations, might lead to a revaluation as that traditional home for money in inflationary times comes to the fore.
Of course, in the end, the market is going to disappear. Some decades down the line the number still alive who smoke will be trivial – teen smoking rates are much lower than those of the general population after all.
For the individual investor, this poses that question. To invest upon those moral grounds and shun sin stocks like Imperial? Or go for the income and the heck with the moral considerations? 8.6 % is attractive and it’s there simply because a lot of people take that high road at their own expense. Whether you wish to be one of them is up to you.
Income investors might well be significantly attracted by Imperial’s 8.6% yield. Others might be repelled by the business line. It’s a choice.