Following strong 2024 results, this 6.1%-yielding FTSE 100 gem looks a bargain to me
The 2024 results from the FTSE 100’s Imperial Brands (LSE: IMB) released on 19 November looked positive to me.
The tobacco and nicotine products firm saw reported operating profit rise 4.5% year on year to £3.55bn. Earnings per share jumped 19.1% to 300.7p.
These numbers were powered partly by market share gains in four of its five priority tobacco product markets. Accounting for the rest was a 26.4% increase in revenue from its next-generation products (combustible tobacco replacements).
In turn, these drove reported free cash flow 3% higher to £2.34bn, allowing for a 4.5% increase in the dividend to 153.42p. Additionally positive for shareholders is the launch of a £1.25bn share buyback, which would tend to support share price gains.
A risk here is any delay in the company’s ongoing switch from combustible tobacco products to non-combustible replacements. This might allow its competitors using the same strategy to gain market share from it.
However, for 2025, the firm expects single-digit net revenue growth and mid-single-digit adjusted operating profit growth.
Where does this leave the share valuation?
To work out whether the stock is undervalued, I started by looking at the key price-to-earnings (P/E) measure. This shows Imperial Brands at just 8.1 against an average 15.2 P/E for its competitor group. So it may be a serious bargain on this basis.
The same is true of its 1.1 price-to-sales ratio compared to a 3.8 average for its peers.
To nail down what this means for its share price, I ran a discounted cash flow (DCF) analysis. Using other analysts’ figures and my own, this shows Imperial Brands shares are 65% undervalued at their current £25.23 price. Therefore, a fair value for them is £72.09.
They may go never reach that point, of course. However, these key ratios and the DCF analysis, underline to me how much of a bargain the stock now looks.
The big dividend bonus for shareholders
This year’s 153.42p a share dividend yields 6.1% on the present share price. It compares very favourably to the current average FTSE 100 yield of 3.6% and to the FTSE 250’s 3.3%.
So, £10,000 of Imperial Brands shares would generate £610 of dividend payments in the first year. Over 10 years on the same average yield, this would rise to £6,100 and over 30 years to £18,300.
This is clearly a much better return than can be made in a standard UK savings account right now. However, the payouts could be turbocharged by using a common investment process known as ‘dividend compounding’. This involves using the dividends paid to buy more of the stock that paid them.
Doing this with £10,000 on the same average 6.1% yield would generate £8,376 in dividends after 10 years, not £6,100. And after 30 years of this, £52,051 in such returns would have been made rather than £18,300.
The total value of the holding by then would be £62,051, generating £3,785 a year in dividend income.
Will I buy more of the stock?
I have built my Imperial Brands shareholding over some time for its strong dividend income and share price growth prospects.
I think these are qualities still strongly in place in my view, so I will be buying more of the shares very soon.
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More reading
- After a solid set of results, is it time to buy this FTSE 100 dividend giant?
- As earnings growth boosts the Imperial Brands share price, is it a top FTSE 100 dividend choice?
- 2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!
Simon Watkins has positions in Imperial Brands Plc. The Motley Fool UK has recommended Imperial Brands Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
