Is this undervalued high-yield FTSE stock an unmissable passive income opportunity?

This FTSE 100 heavyweight looks very undervalued to me, has strong growth prospects, and pays a high dividend that can make significant passive income.

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FTSE 100 tobacco and nicotine replacement products giant Imperial Brands (LSE: IMB) paid a 2023 dividend of 146.82p. This gives a yield on the current £20.43 share price of 7.2%.

This is double the FTSE 100’s average yield of 3.6%, and more than twice the FTSE 250’s 3.3%.

If I invested £17,000 (the average UK savings account amount) in the shares, I would make £1,224 this year. If I withdrew that money and spent it, I would have the same return next year, provided no change in the yield. Over 10 years on the same basis, I would have an extra £12,240.

However, if I bought more of the shares with the dividends it paid me (‘dividend compounding’) I would make much more.

In this case, after 10 years I would have an additional £17,850 rather than £12,240. This would give me a total pot worth £34,850.

Over 30 years on the same average yield, its value would have risen to £146,461.It would pay me £10,545 a year in dividends, or £879 every month!

What is the dividend yield outlook?

Yields rise and fall on changing share prices and dividend payments. Over time though, both are likely to rise if a company’s earnings consistently increase.

One risk in Imperial Brands is any delay in its transition from tobacco products to nicotine ones. This might allow its competitors to gain a market advantage. Another is any legal action arising from the use of its tobacco products in the past.

However, 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-2026. Return on equity is forecast to be 47.9% by that point.

Forecasts are also for dividend payments to rise to 153.2p a share this year, 160.5p in 2025, and 169.6p in 2026. On the current £20.43 share price, this would give respective yields of 7.5%, 7.9% and 8.3%.

Is it undervalued?

Imperial Brands shares 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 15.1.

The same is true on the price-to-sales metric, with the firm trading at only 1, against a 3.2 peer group average.

A discounted cash flow analysis shows it to be 61% undervalued at its current price of £20.43. So a fair value would be around £52.38, although there is no guarantee they will reach that level.

Its high yield, extreme undervaluation, and strong business prospects make it an unmissable passive income opportunity for me. Consequently, I will be adding to my holding in the stock at the earliest opportunity.

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.

Simon Watkins has positions in Imperial Brands Plc. 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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