Imperial Brands and Legal & General offer dividend investing potential

Robert Stephens, CFA, considers the prospects for two high-yielding FTSE 100 index shares – Imperial Brands and Legal & General. 

FTSE 100 index shares Imperial Brands (LON: IMB) and Legal & General (LON: LGEN) could offer relatively attractive dividend investing prospects at a time when the pandemic has made it more difficult to generate a worthwhile income stream. 

Interest rates have fallen to near-zero, which has reduced the returns on assets such as cash and bonds. Furthermore, a loose monetary policy has pushed equity valuations to high levels. When combined with a sluggish return to dividend payouts following 2020’s hiatus, dividend yields are extremely low by historical standards. Indeed, the FTSE 100 yields just 3% at the present time.

However, the high yields and dividend prospects offered by Imperial Brands and Legal & General could mean they have long-term income investing appeal at the present time.

Imperial Brands

The 60% decline in the Imperial Brands share price over the past five years means that the company currently yields 8.8% despite dividend cuts in recent years. Its shareholder payouts have come under pressure at least partly because of falling global cigarette volumes, as consumers switch to less harmful products.

While this trend may persist, the company is putting in place a revised structure that could make it more efficient. It is also aiming to expand its presence in reduced risk products, such as heated tobacco, that may provide a substitute for traditional tobacco products. Meanwhile, its dividend is forecast to be covered 1.7 times by net earnings in the current year, with its recent financial update showing it is on track to meet previous guidance.

Alongside a high yield, Imperial Brands has significant pricing power due to the relatively inelastic nature of demand for its products. It may also provide a worthwhile hedge against inflation, since it is relatively likely to maintain current margins even if its input costs rise in a global post-coronavirus economic recovery. Its price-earnings ratio of 10 suggests it offers a margin of safety relative to other FTSE 100 index shares.

Legal & General

The Legal & General share price has fared much better than the FTSE 100 index over the past five years. It has risen 30% in that time, versus 5% for the index, yet it currently yields a relatively high 6.8% from a dividend that is due to be covered 1.7 times by net profit this year.

Moreover, Legal & General has a long history of dividend growth. For example, over the past five years its dividends have risen by 5.6% per year on a per share basis. 

Looking ahead, they are forecast to rise at an annualised rate of 3.6% over the next three years as the company delivers its strategy. It appears to be well-placed to participate in a global recovery following the pandemic, with the company focused on six long-term catalysts such as climate change and environmental, social and corporate governance (ESG) investing.

Following a resilient performance during the pandemic, Legal & General appears to have a relatively robust financial situation. Its price-earnings ratio of 10 indicates that it could be undervalued given its forecast growth rate in earnings per share of 11.5% per annum between the 2020 and 2023 financial years.