Imperial Brands offers an enticing dividend yield of 4.8%

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Imperial Brands (LON: IMB) (IMB.L) shares have underperformed the FTSE 100 recently. While the FTSE 100 is hovering around its all-time highs, Imperial has fallen from above 4,100p in August last year to 3,550p today, a decline of almost 15%. The market clearly has some doubts about the long-term profitability of the company.

Buying high-quality companies when they’re out of favour is a strategy that can reward investors in the long term, and in my opinion, the fall in Imperial’s share price has created an opportunity to pick up a sizeable dividend yield at a very reasonable valuation.

Incredible dividend growth

Imperial has quite an incredible dividend growth history.

Over the last 15 years, the company has increased its dividend payout from 34.5p to 155.2p, meaning that an investor who bought the shares 15 years ago would now be enjoying a yield of around 14% on their original purchase price, according to my calculations.

Furthermore, over the last eight years, the company has increased its dividend by an impressive 10% per year, and management recently stated that the company is “committed to this size of increase in the medium term.”

Growth opportunities

With tobacco volumes falling 5.7% for the six months to 31st March 2017, it’s understandable that the market has doubts about the long-term profitability of the company. But Imperial does have growth opportunities and is investing heavily in the e-vapour market, a market that has grown 300% in the past four years and is forecast to grow to $30bn in the next seven years.

High yield / low valuation

A forecast dividend payout of 171.1p for Fy2017 equates to a generous yield of 4.8% at the current share price and on a forward looking P/E ratio of 12.8 (vs 18.3 for rival British American Tobacco) the shares now trade at a very reasonable valuation. Indeed, fund manager Neil Woodford stated this week that “Imperial Brands now looks by far the more appealingly valued of the two.”

Forecast earnings of 269p give a dividend coverage ratio of 1.6, which suggests that there’s no need to panic about dividend sustainability.

With that in mind, I believe shares in Imperial Brands look appealing right now and the dividend yield of 4.8% stands out as one of the most enticing dividend yields in the FTSE 100 at present.

Disclosure: Edward Sheldon, CFA owns shares in Imperial Brands

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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