Are Imperial Brands shares the greatest bargain in the FTSE 100?

Should the dreadful performance of Imperial Brands shares be overlooked due to the exceptionally low valuation? Paul Summers runs the rule.

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Imperial Brands (LSE: IMB) shares have massively underperformed the FTSE 100 for a while. Is this a sign to steer clear or could the company actually be a wonderful bargain buy?

Initially, I’d say the former. After looking a bit deeper, however, there are actually a few things I like here.

Out of puff

Granted, the trajectory of the share price has been down for quite a while. In the last five years, Imperial’s shares have fallen by a third in value. That compares to a gain of almost 3% in the FTSE 100.

The short-term performance isn’t much better. If I’d picked up the tobacco giant’s stock at the beginning of 2023, my position would be worth 14% less by Friday, 1 September. Again, this compares poorly to the top-tier index, which has managed a stellar (ahem) drop of 1%.

At this point, we may consider packing up and moving on. But wait.

Monster yield

One of the things that make Imperial Tobacco’s shares appeal is the dividend yield — a massive 8.5% in the next financial year (beginning 1 October). That’s more than double the yield of the FTSE 100 (3.8%).

I also like the company for its defensive qualities. Ethical considerations aside, the demand for its addictive products is naturally a lot more stable than other things. That’s worth noting as recessionary clouds continue to gather.

And then there’s that valuation.

Imperial looks (very) cheap. Right now, I can pick up the stock for just over five times forecast FY24 earnings. This makes it one of the lowest-valued shares in the index.

This starts to look even more interesting given that Imperial has actually multi-bagged in value since the new millennium began.

Terminal decline

For me, however, a stock can only be considered a bargain relative to its quality. In other words, I’d be prepared to buy a stock at a fairly high valuation if I believed this was reflected in its fundamentals and growth prospects. As with many things in life, you tend to get what you pay for.

Now, this isn’t to say previously beaten-up stocks can’t deliver outstanding returns if you get your timing bang on. Take a look at the share price of Rolls-Royce this year for evidence of that.

Even so, I’m struggling to see how Imperial will claw back existing investors’ paper losses anytime soon. The popularity of cigarettes is in terminal decline and sales of next-generation alternatives still can’t offset this. Oh, and there’s the ongoing threat of regulation to contend with.

Bargain buy?

Ultimately, Imperial leaves me shrugging my shoulders.

As bad as things have been, I regard this stock as one I might consider owning if receiving income from my portfolio was a priority, perhaps as a way of supplementing a pension.

Since I’m not thinking of retiring anytime soon, however, I won’t be investing today. While barriers to entry remain extremely high, I’m struggling to see how the company will grow my money at the same clip as stocks in other sectors in the years ahead. That’s if it grows at all!

The greatest bargain in the FTSE 100? I’m not convinced.

Imperial is unloved, perhaps rightly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers 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.

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