FTSE 100 tobacco and nicotine products manufacturer Imperial Brands (LSE: IMB) has seen its shares rise since mid-April.
This followed a trading update stating that its H1 2024 adjusted profit would be higher than last year’s.
It added that it remained on track to deliver a £1.1bn buyback programme by 29 October. Buybacks tend to be broadly supportive of share price gains.
However, the 22% price rise since the update does not mean there is no value left in the shares.
Growing business
As flagged by the firm, its H1 adjusted operating profit rose by 2.8% year on year. Also positive was net revenue growth of 16.8% for its next-generation nicotine substitute products.
This followed its full-year 2023 results showing operating profit up 26.8% from 2022 to £3.4bn.
From here, consensus analysts’ estimates are that its earnings per share will rise by 5.9% a year to end-2027. Return on equity is forecast to be 47.9% by that point.
Do the shares look cheap?
Despite this price rise, Imperial Brands’ shares still trade on the key price-to-earnings (P/E) stock valuation measure at just 8.3.
This looks very cheap compared to its peer group average of 14.9.
A discounted cash flow analysis shows the shares to be around 61% undervalued at their current price of £20.59. So, a fair value would be around £52.79.
There is no guarantee that they will reach that level, of course. One risk in the shares is that its ongoing transition from tobacco products to nicotine replacement ones falters. This might allow its competitors to gain a market advantage. Another is any legal action arising from the use of its products in the past.
However, this extreme undervaluation makes it one of the biggest bargains in any of the main FTSE indexes to me.
Big passive income payer
In 2023, Imperial Brands paid a total dividend of 146.82p, giving a current yield of 7.1%.
This is already at the higher end of FTSE dividend payouts, but consensus analysts’ forecasts are that it will rise.
Specifically, expectations are for dividends of 153.5p a share this year, 163.3p in 2025, and 171.7p in 2026. On the current £20.59 share price, this would give respective yields of 7.5%, 7.9% and 8.3%.
However, £10,000 invested at the current 7.1% yield would make £710 in the first year. If the dividend averaged the same over 10 years, then £7,100 extra would be made to add to the £10,000.
Crucially though, this could be much more if the dividends paid were reinvested to buy more of the stock. This is known as ‘dividend compounding’ in investment and is the same principle as compound interest in a bank account.
If this were done, then an extra £9,856 would be made instead of £7,100!
After 30 years, provided the yield averaged 7.1%, the investment pot would total £78,286. This would pay £5,558 a year in dividend payments, or £463 each month.
I already own Imperial Brands shares, bought at a much lower price. Despite this, I intend to buy more, given the extreme undervaluation, good growth prospects, and high yield.
