A 5.4% yield but down 11%, is it time for me to buy more of this FTSE heavyweight stock?
FTSE 100 tobacco and nicotine substitute products manufacturer Imperial Brands (LSE: IMB) is down 15% from its 7 May 12-month traded high.
Much of this decline followed the release of its H1 2025 results. However, this did not relate to the numbers – which were broadly good. Instead it resulted from the announcement that CEO Stefan Bomhard will retire, effective on 1 October.
Markets often react like this to such events in my experience as a former investment banker and longtime private investor. Sometimes it is merited but often changes at the top have little impact on the performance of huge companies.
Consequently, whenever I see such a price reaction to an event like this I think a bargain may be available.
How undervalued are the shares right now?
My starting point in seeing whether this is true here is to compare Imperial Brands’ key valuations with its competitors.
Its 8.5 price-to-earnings ratio looks very cheap against the 21.2 average of its peers. In fact, it is bottom of this group that comprises Altria at 9.7, Japan Tobacco at 17, British American Tobacco at 23.1, and Philip Morris at 35.
The same is true of 1.2 price-to-sales ratio – again bottom of its competitor group, which averages 4.2.
The second part of my assessment is to run a discounted cash flow (DCF) analysis. This establishes where any firm’s share price should be, based on future cash flow forecasts for it.
The DCF in Imperial Brands’ case shows the shares are 48% undervalued at their current £28.24 price.
Therefore, their fair value is £54.31, although various market forces could push them lower or higher.
How fundamentally solid does it look?
A risk for the firm is that its ongoing strategic shift to nicotine-replacement products from tobacco ones fails for some reason. This would give its competitors that are doing the same thing an advantage.
However, its 14 May Q1 2025 results showed adjusted operating profit rise 1.8% year on year to £1.652bn. Earnings per share (EPS) jumped 6% over the same period to £123.9m. And it is earnings that power any firm’s share price and dividends over the long term.
Its next-generation products (NGP) – including vaping – saw net revenue growth of 15.4% over the period. Revenue is the total income made by a company while earnings are what is left after expenses.
Looking ahead, the firm reiterated its double-digit compound annual growth rate (CAGR) for NGP revenue to 2030. It projects low-single-digit CAGR for tobacco net revenue over the same period. It also expects annual operating profit growth of 3%-5% and EPS growth in the high single digits.
It additionally estimates free cash flow of £2.2bn-£3bn every year to the end of 2030. And this can act as a major driver for company growth in itself.
Will I buy more of the shares?
I already own shares in the firm, which I bought for the mix of their extreme undervaluation and good dividend yield.
The heavy price discount to fair value remains, and it also looks like the dividend yield will rise again too.
More specifically, analysts forecast the dividend will increase from the current 5.4% to 6% this year, 6.3% next year and 6.7% in 2027.
Given these factors, I will buy more of the stock very shortly.
The post A 5.4% yield but down 11%, is it time for me to buy more of this FTSE heavyweight stock? appeared first on The Motley Fool UK.
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More reading
- 6.7% yield! Here’s the dividend forecast for Imperial Brands shares to 2027
- Up 68%, is this top UK dividend share still a bargain buy?
- £10,000 invested in Imperial Brands shares 10 years ago is now worth…
Simon Watkins has positions in British American Tobacco P.l.c. and Imperial Brands Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and 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.
