Imperial Brands (LSE: IMB) shares look cheap at the moment. At present, the tobacco company has a price-to-earnings (P/E) ratio of just 6.2 – less than half the FTSE 100 average.
Is Imperial the best cheap stock on the Footsie right now? Let’s discuss.
Plenty of appeal
Looking at Imperial Brands shares today, I can definitely see some appeal. For a start, there’s an enormous dividend yield on offer.
For the year ending 30 September, the company is expected to pay out 146p per share in dividends. At today’s share price (1,768p), that equates to a yield of about 8.3%.
Secondly, there are share buybacks here. In its half-year results, Imperial said it was on track to buy back £1bn worth of stock this financial year. Given that the company has a market-cap of less than £16bn, that’s significant.
Buybacks give existing investors a bigger piece of the pie in terms of company ownership. They also tend to boost earnings per share over time, making the company more attractive from a valuation perspective.
A third plus is the company’s defensive attributes. In the past, tobacco has been a pretty defensive sector, holding up well during periods of economic weakness. This is a valuable attribute right now, given the state of the economy.
So I’d feel more secure owning Imperial than owning a highly cyclical stock like a housebuilder.
The best cheap stock?
As to whether Imperial is the FTSE 100’s best cheap stock though, I’m not convinced. One major issue that concerns me here is debt on the company’s balance sheet. At 31 March, net debt was £10.2bn.
This leverage adds quite a bit of uncertainty now that interest rates are higher. For example, higher interest payments could put the dividend payout at risk.
Another issue is growth. In recent years this has really stalled. For the half year to 31 March, revenue growth was just 0.3%. With no top-line growth, the company could see its earnings shrink over time as costs rise.
And if earnings did shrink, the stock may not look so cheap after all, as the ‘E’ in the P/E ratio would be smaller.
Finally, the technicals look a bit ugly right now. Currently, Imperial Brands’ share price is below both its 50-day and 200-day moving averages. What this means in simple terms is that the stock is in both a short- and long-term downtrend. Buying stocks in downtrends can be dangerous as trends can last a while.
Given the debt, lack of growth, and weak share price action here, I don’t see Imperial Brands as the FTSE 100’s best cheap stock today.
All things considered, I think there are better cheap shares to buy in the index right now.
