This FTSE 100 value stock pays an 8% dividend yield!

I’m looking at a promising FTSE 100 stock that could pay decent dividends if it maintains its reputation in what’s an undeniably controversial industry.

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Dividends are basically free money we earn while we sleep, so I’m always looking for FTSE 100 companies that pay reliable dividends.

Today I’m examining one stock that I think could be a great value buy for me. However, it depends on the company’s ability to adapt and innovate.

An industry under fire

Imperial Brands (LSE:IMB) is a FTSE 100 company that manufactures tobacco and tobacco-related products globally.

It’s a controversial industry that has investors divided due to the health implications and the profits involved. Many industry players are working to improve the health standards of their products. For example, adding vape products and similar items that are less toxic. 

In an industry with strong competition, I think Imperial Brands is particularly promising. Competitors like British American Tobacco and Philip Morris International offer similarly high dividends but lack the same reliable track record of payments.

Tobacco producers are well-positioned to cover their dividend payments due to the high level of cash they process. These days they tend to offer that more diversified range of products, ensuring more reliable income and dividend payments.

Price performance

Down 7.8% in 2023, Imperial had a slightly worse year than the overall UK market but outperformed the UK Tobacco industry. The past two months have seen of a recovery, with the share price up 14% since an October 2023 low of £16.80.

That said, with £10.10bn in debt and only £6.6bn in equity, Imperial’s debit-to-equity (D/E) ratio is considered high. This is one area of concern that I’d keep an eye on if I do choose to invest. 

With an impressive price-to-earnings (P/E) ratio of 7.8 times, Imperial is estimated to be undervalued by 54%. Analysts feel a share price of £29 would be more fair, so I think it has good growth potential.

Price to rise?

Analysis of Imperial Brands varies wildly but on average, forecasters expect a 25% price increase over the next 12 months. Revenue is forecast to decline at 14% per annum but future return on equity (ROE) is forecast to be 51% in three years.

With dividend stocks, price performance isn’t quite as important as it is for growth stocks. Of course, we don’t like to see the prices of the shares we’ve bought falling. But if the share price doesn’t perform well, it can sometimes be balanced by gains from dividend payments. This is key to ensuring we capture value from our investments even in the face of an uncertain economic environment.

The important thing is to ensure we choose stocks that make reliable payments. Remember, companies can choose not to pay dividends at any time. I always look closely at the company’s historic record of payments to ascertain its long-term viability as a dividend-paying stock.

The bottom line

I think Imperial Brands needs to focus on improving its public image and developing healthier products. These days, fewer young people are smoking traditional cigarettes in countries all over the world. This is why innovation and branching out into vape-style products will be key to the company’s future.

Imperial’s debt is mildly concerning but otherwise its balance sheet and past performance hold up against scrutiny. I’m still on the fence about whether or not to buy so I’ll keep it on my watchlist.

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.

Mark Hartley has no position in any of the shares mentioned. 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.

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