10% dividend increase! Is IMI one of the best stocks to buy in the FTSE 100 index?

To me, this firm’s multi-year record of well-balanced progress makes the FTSE 100 stock one of the most attractive in the index.

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Within the FTSE 100 index, I’m keen on IMI (LSE: IMI). The company designs, builds, and services engineered products for fluid and motion control applications. As an industrial business, it can be sensitive to economic cycles, and that’s the biggest ongoing risk for shareholders here.

However, today’s (26 July) news of a 10% increase in the interim shareholder dividend is welcome. It comes with the backing of an encouraging first-half results report, which extends a multi-year period of steady business progress.

Consistent trading and steady growth

But the chart below shows how volatile the stock can be. It would be easy to lose money with this one if general economic conditions deteriorate.

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Created with Highcharts 11.4.3IMI PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Nevertheless, despite the difficulties for world economies over recent years, IMI’s business performance has been consistent and tilting towards growth. The multi-year record for normalised earnings shows advances each year since at least 2018.

The pandemic doesn’t even register in the earnings record. However, like many businesses, IMI took the step of preserving cash and reducing dividend payments in 2020.

The directors rebased the payment lower by 50% back then, saying at the time the move would enable IMI to “effectively deliver on its long-term growth ambitions”.

I reckon restructuring and growth initiatives have progressed well since then. The firm has been rebuilding dividend payments, and that trend looks set to continue.

City analysts have pencilled in high-single-digit percentage increases for the total annual dividend both this year and next. That means 2025’s total payment will likely be in the ballpark of 33p, up from 22.5p in 2020.

However, with the share price near 1,837p, IMI forward-looking yield’s modest at just below 1.8%.

But the great thing about IMI is the ongoing, well-balanced, multi-year growth in revenue, earnings and cash flow. The business is doing well and expanding. Its performance through the pandemic demonstrates the strong niche the company commands in its markets.

In today’s report, chief executive Roy Twite pointed to a 5% year-on-year increase in organic sales during the first half. That drove a 6% rise in adjusted organic operating profit and the overall performance of the business was “in line with expectations”.

IMI achieved organic growth and profit margin improvements despite “mixed” end markets, Twite added.

A positive outlook

The directors appear confident in the outlook because they also announced a £100m share buyback programme.

When a company buys back and cancels some of its own shares, the earnings and dividends are spread over fewer remaining shares. So that tends to push up the per-share figures, theoretically boosting returns for shareholders.

However, share buybacks only really make sense if the company’s buying good value. With a forward-looking price-to-earnings rating of just under 14 for 2025, IMI looks like it’s priced around the average of all firms in the Footsie.

So the stock isn’t obviously cheap. But to me, the long record of steady trading and progress makes the company look like decent value with an undemanding price tag.

I think it’s one of the best stocks to consider buying in the Footsie.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended IMI. 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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