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Why I’m buying more of Neil Woodford favourite Imperial Brands plc today

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Shares in international tobacco group Imperial Brands (LSE: IMB) have taken a beating recently. While the rest of the market has trundled along, shares in the company have declined by more than 8% so far this year, and over the past 12 months, the shares are down nearly a fifth excluding dividends.

This poor performance is yet another blow to former star fund manager Neil Woodford. His flagship Equity Income fund counts Imperial as its most significant holding with 7% of assets devoted to the company. The stock also holds the top spot in Woodford’s Income Focus fund portfolio.

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The question has to be, is the market right to be dumping Imperial or this is the perfect opportunity for income seekers to buy into the company’s 6.7% dividend yield?

Buy, sell or hold? 

Over the past six months, there have been two significant developments that have weighed on Imperial’s shares. For a start, the pound has recovered most of its losses printed in the aftermath of the Brexit vote. Last year the company received a massive boost from sterling’s devaluation as the bulk of its revenues come from outside the UK. For example, for the year to the end of September, the firm reported an 8.2% increase in tobacco net revenue, although in constant currency terms the same metric fell by 2.6% year-on-year. Excluding the impact of favourable currency movements, adjusted earnings per share for the period declined 2.2%, that’s compared to growth of 7% on a reported basis.

As a result of sterling strength, analysts have been downgrading their expectations for the company. At the beginning of 2017, the City was expecting Imperial to report earnings per share of 288p for Fiscal 2018, now earnings of 260p are projected.

Still, even at this lower target, the shares are dirt cheap trading at a forward P/E of only 10.9, making Imperial one of the most affordable consumer goods stocks in the world.

The other reason why shares in the company have taken a beating recently is because Japan Tobacco, which many analysts believed would make a bid for Imperial, has come out to say that it is not interested in the UK group. It seems many buyers who were betting on this development have now become sellers.

Look to the long term

For long-term investors, the above factors are hardly anything to worry about, and that’s why I’m still buying shares in Imperial despite the declines over the past year.

The company may be facing some headwinds in the form of declining tobacco sales, but it is taking action to remedy these issues investing in new technology for smokers. At the same time, its legacy business is still highly profitable and should support further dividend growth. According to full-year figures for fiscal 2017, Imperial’s cashflow from operations of £3bn easily covered the total dividend distribution of £1.5bn.

So overall, I’m buying more Imperial after its recent declines for the company’s market-beating dividend yield and rock-bottom valuation.

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Rupert Hargreaves owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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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