One FTSE 100 stock I reckon could be an overlooked bargain is Imperial Brands (LSE: IMB).
Here’s why I think it’s worth investors taking a close look at the tobacco king for juicy returns.
Imperial shares on the up
The entire UK premier index has been on the up recently due to better-than-expected economic developments. In turn, it’s not a huge surprise for me to see Imperial shares edging upwards too.
Generally speaking, they’ve been struggling for a number of years due to smoking numbers declining. In addition to this, anti-smoking sentiment has been increasing too, which hasn’t helped the share price.
Over a 12-month period, Imperial shares are up 13% from 1,698p at this time last year, to current levels of 1,925p.
My investment case explained
Starting with the bear case, it’s hard to ignore some of the issues mentioned earlier, namely declining smoking numbers and increasing anti-smoking sentiment. The obvious issue here is that declining sales and potential legislation changes could have a real impact on performance, returns, and investor appetite for the stock.
In addition to this, global economic woes have meant that Imperial – and many other businesses – have had to hike prices. This aspect worries me, as it could mean another blow to performance levels. I’ll be keeping an eye on this.
Moving on to the other side of the coin, Imperial’s storied track record of performance, generous rewards policy, as well as brand power and reach are all major plus points. However, I do understand that past performance is not a guarantee of the future.
In regards to declining smoking numbers, Imperial and other tobacco firms are developing next generation products. These include vapes and other non-tobacco alternatives. Sales of these products are rising sharply, which could offset weaker sales of traditional products. This timely boost could keep the cash rolling in.
Breaking down some fundamentals, Imperial shares are dirt-cheap, in my view. They currently trade on a price-to-earnings ratio of just seven. Any stock with a P/E ratio of below 10 usually grabs my attention.
Furthermore, a dividend yield of over 7.5% is extremely attractive, and higher than the FTSE 100 average of close to 4%. However, it’s worth mentioning that dividends are never guaranteed.
Cash is king
I can understand why some investors may be hesitant to buy Imperial shares. When you factor in declining numbers, the rise in ESG investing, and global governments looking to curb smoking levels, there are real risks involved.
However, for me, Imperial still represents a great opportunity to earn dividends and boost wealth. Let’s be honest, changing laws and bringing smoking levels down drastically, is not an overnight endeavour. It could take years, maybe even decades!
Imperial is primed to continue to make cash hand over fist in that time, if you ask me. If the firm’s history has taught me anything, it’s that it won’t hesitate to reward investors who come along for the ride.
The post 1 dirt-cheap FTSE 100 stock investors should consider buying in June appeared first on The Motley Fool UK.
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Sumayya Mansoor has no position in any of the shares mentioned. 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.