I’ve noticed that the Imperial Brands (LSE: IMB) share price is down considerably in 2023 to date. Is now an opportunity for me to pick up cheap shares to help boost my holdings and wealth?
Why has the Imperial Brands share price fallen?
As a quick reminder, Imperial is one of the largest tobacco companies in the world. You may recall it was once known as Imperial Tobacco. Some of its prominent brands include John Player, Winston, Davidoff, and Rizla.
So what’s happening with Imperial Brands’ shares currently? Well, as I write, they’re trading for 1,716p. At the turn of the year, they were trading for 2,090p, which is a 17% decline so far in 2023. It is worth noting that the shares are only down 2% over a 12-month period as they were trading for 1,769p at this time last year.
I believe Imperial Brands shares have fallen for two reasons. Firstly, the current economic picture globally has hampered the shares. Rising costs, inflation, as well as a post-pandemic hangover has continued to impact many stocks on markets worldwide.
In addition to this, the fact that tobacco use is declining worldwide is also a contributing factor, in my opinion. I believe this is also reflected by the fact that the shares have been on a steady decline for a number of years. For example, back in 2016, they were trading for close to 4,000p.
Pros and cons and my verdict
Despite Imperial Brands shares continuing to fall, I see some bullish traits that have caught my eye. To start with, Imperial is considered a solid dividend stock and currently possesses an enticing yield of over 8%. It also has a great record of paying out as well as raising dividends due to the nature of its addictive products, which underpins consistent performance.
Next, Imperial shares currently look cheap at face value with a price-to-earnings ratio of just nine.
Finally, Imperial has recognised the spectre of declining tobacco use and continues to focus on tobacco alternative products too. These products could help boost its performance and maintain its status as a good dividend payer.
To the bearish aspects then. Despite the allure of Imperial’s passive income opportunity, it is always worth remembering that dividends are never guaranteed. They can be cancelled at any time at the discretion of the business to conserve cash.
More importantly for me, Imperial operates in a highly regulated industry due to the proven ill effects on the health due to smoking. The threat of tightened or further regulation that could impact demand, performance, and any returns is a credible risk in my eyes.
Finally, I noticed that Imperial has a lot of debt on its balance sheet. This does not sit well with me, as debt requires servicing and paying down. This could impact shareholder returns as well as any growth initiatives for the future.
Taking into account the pros and cons of Imperial shares, I’ve decided to sit on the sidelines and put the stock firmly on my watchlist for now.
The falling Imperial Brands share price alone is not tempting enough for me. The declining demand for tobacco products, coupled with high debt levels and the ever-present threat of regulatory issues, have helped me make my decision.
