IMI PLC: A Reassessment of Dividend Sustainability Amid Earnings Growth and Strategic Reinvention

The question of whether IMI PLC (LON:IMI) can sustain and grow its dividend has long been a subject of debate among income-focused investors. Historically, the company's dividend growth has been erratic, with a five-year annualized decline of 6.50% and a ten-year average of -4.60%. However, a closer look at its recent financial performance and strategic shifts suggests that the company may now be entering a more stable phase. With earnings growth, a disciplined payout ratio, and a focus on high-margin aftermarket services, IMI's dividend could finally transition from a liability to a compelling long-term income proposition.

Earnings Growth and Margin Expansion: A Foundation for Stability

IMI's 2024 results underscored its ability to drive profitability despite flat revenue. By reducing its cost of goods sold from 53.83% to 52.73% of sales, the company improved its gross margin to 47.17% and net profit margin to 10.84%. This margin expansion, coupled with a 4.72% increase in net income to £248.50 million, has provided the financial flexibility to balance reinvestment and shareholder returns.

The Q2 2025 dividend payout ratio of 39% (dividends per share of £0.254 vs. earnings per share of £0.659) is a critical metric. While this ratio is higher than the full-year 2024 payout of 24%, it remains below the company's 13-year median of 48%. This suggests IMI is retaining a significant portion of earnings—currently 61%—for reinvestment, a prudent approach in a capital-intensive industry. The company's cash flow generation further supports this strategy: operating cash flow of £371.60 million in 2024 and a 21% increase in adjusted operating cash flow to £158 million in H1 2025 demonstrate its ability to fund growth without overleveraging.

Strategic Reinvention and High-Margin Focus

IMI's transformation under its 2019 growth strategy has been pivotal. By shifting toward higher-margin aftermarket services—now accounting for 45% of Group sales—the company has insulated itself from cyclical demand swings in industrial automation and transport. This focus on recurring revenue streams has driven a 550 basis points expansion in adjusted operating margins since 2019, a testament to the durability of its business model.

The recent 10% increase in the interim dividend to 11.0p per share, alongside a £200 million share buyback, signals confidence in this strategy. CEO Roy Twite's emphasis on “compounding organic growth” and a record order book in Process Automation further reinforce the company's momentum. While the cyber incident in Q1 2025 temporarily disrupted Industrial Automation, the segment is now rebounding, and the company has maintained its full-year guidance of mid-single-digit organic revenue growth and adjusted EPS between 129p and 136p.

Addressing Historical Volatility: A New Era?

IMI's dividend history has been marred by volatility, with a five-year dividend growth rate of -5.42% and a payout ratio that has swung between 23% and 65% over the past decade. However, the current trajectory suggests a shift. The 2025 interim dividend increase marks the first meaningful raise in several years, and the company's 21% projected full-year payout ratio (based on its 129p–136p EPS guidance) indicates ample room for future hikes.

The key question is whether IMI can maintain this trajectory. The company's net debt to adjusted EBITDA ratio of 1.4x (within its target range of 1.0x–2.0x) and a cash-generative business model provide a buffer against external shocks. Additionally, its strategic review of the Transport sector—responsible for 8% of 2024 sales—aims to eliminate underperforming assets, further strengthening its capital allocation discipline.

Investment Implications

For long-term income investors, IMI presents a nuanced case. The company's current dividend yield of 1.58% is modest compared to its historical median of 3.08%, but its earnings growth and low payout ratio (21% for 2025) suggest a path to sustainable increases. The challenge lies in reconciling its historically volatile dividend record with its recent strategic and financial improvements.

IMI's focus on high-margin aftermarket services, coupled with its strong balance sheet and disciplined capital allocation, tilts the risk-reward balance in favor of long-term holders. While the dividend is not yet a “blue-chip” staple, the company's trajectory—supported by a 52.5% projected EPS expansion in 2025—makes it an intriguing candidate for investors seeking growth with a side of income.

Conclusion
IMI's journey from a company plagued by dividend volatility to one with a credible path to sustainable payouts is far from complete. However, its margin expansion, strategic reinvention, and prudent financial management have laid a solid foundation. For investors willing to look beyond its past and bet on its future, IMI offers a compelling blend of earnings growth and dividend potential—a rare combination in the industrial sector.