Shares in the FTSE 100’s Imperial Brands (LSE: IMB) have jumped 34% from their 4 October 12-month low of £15.53.
Strong recent results
Much of the latest upsurge in price came from its H1 2024 results released on 15 May. These showed adjusted operating profit rose 2.8% over H1 2023 to £1.67bn.
This was partly driven by strong tobacco pricing that saw an 8.6% jump over the period. It also reflected a 16.8% rise in sales of its key ‘Next Generation Product’ (NGP) brands. These include its heated tobacco and nicotine replacement products.
Before that, the firm’s share price benefitted from positive full-year 2023 results. These showed net revenue growth of 26.4% in its NGP lines. Its combined tobacco and NGP net revenue increased to £8bn from £7.7bn in 2022.
Consequently, it looks to me like its ongoing transition away from smoking products is going well.
Indeed, in the latest results, the firm said its five-year transition plan will result in higher adjusted operating profit growth to 2026. It will also produce mid-single-digit percentage compound annual growth over that time, it added.
How does this leave the share price?
A risk to its five-year plan is a further tightening of legislation against tobacco products and even nicotine replacement ones. Another is that it loses share to its competitors in this highly competitive market.
However, as of now, its share price still looks very undervalued against those peers.
On the key price-to-earnings (P/E) stock valuation measure, it currently trades at just 8.5. This looks very cheap compared to its peers’ average of 13.4. The group comprises British American Tobacco at 6.6, Altria at 10, Japan Tobacco at 16, and Phillip Morris at 21.
The same is true on the price-to-sales metric, with Imperial Brands trading at only 1, against a 3.4 peer group average.
To work out how cheap it looks in cash terms, I used a discounted cash flow analysis. This shows the stock to be around 61% undervalued right now at its price of £20.88.
So, a fair value for the share would be £53.54, although it could go lower or higher than that.
A big dividend payer too
The company raised its interim dividend by 4% to 44.90p a share in its H1 2024 results. If this was applied to its total 2023 dividend of 146.82p, it would give a 2024 payment of 152.69p. On the current share price, this would yield 7.3%.
Looking ahead, analysts estimate yields of 7.7% in 2025 and 8.1% in 2026.
This sort of yield can generate big income if the dividend payments are used to buy more of the shares.
For example, £10,000 invested at 7.3% (with the dividends reinvested) will make an extra £10,705 after 10 years. After 30 years on the same basis, there would be an additional £78,761!
So, what will I do?
I hold shares in Imperial Brands for their high yield, extreme relative undervaluation, and strong growth prospects.
If I did not already have them, I would buy them today for the very same reasons.
The post Is this 7%-yielding FTSE 100 dividend star still a bargain after a 34% price rise? appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
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See the full investment case
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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.
