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.
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.
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.
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.