This FTSE 100 stock could jump 50% and yields 7.5%

With a possible upside of 50%, Rupert Hargreaves looks at one FTSE 100 (INDEXFTSE: UKX) stock he thinks every investor should own.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past two years, shares in Imperial Brands (LSE: IMB) have produced one of the worst performances in the FTSE 100. Excluding dividends, since October 2017, the stock has declined 32%, underperforming the FTSE 100 by 26%.

Imperial isn’t the only tobacco stock that has suffered during this period. Its only other London listed peer, British American Tobacco, has seen its shares decline 29% over the past two years, and by 27% over the past 12 months, excluding dividends.

It’s difficult to pinpoint the exact reason why both companies have fallen out of favour with investors, but I can hazard a guess.

Policymakers around the world are taking an increasingly hard line towards tobacco products, and there’s a genuine threat that cigarettes could be banned altogether in some countries. Imperial’s lack of preparation for the future seems to be scaring investors away.

Planning for the future

Of the three leading international tobacco companies outside of China, Imperial is generally considered to be the most behind when it comes to the development and production of smoking alternatives, such as vaping pens and heated tobacco devices. British American and Philip Morris have been working to grab market share in these sectors for some time, leaving Imperial playing catch up.

To try and meet investor concerns, the company’s management is ramping up the production and development of so-called new generation products (NGP). In a recent investor presentation, Imperial announced that it would bring out new vaping devices as part of its blu e-cigarette brand, and unveiling a new device called Pulze, which heats tobacco rather than burning it, as part of the assault on the NGP market.

These new offerings could deliver compound annual revenue growth of 35% to 150% over the next three financial years, the company believes. If these forecasts come to fruition, NGPs could make up as much as 17% of total sales by 2020.

Growth potential 

If Imperial can successfully dominate the NGP market, I believe the stock could rocket. Right now, the shares are changing hands for just 9.9 times forward earnings which, in my mind, is suitable for a low- or zero-growth business, but gives no credit whatsoever to the growth potential here. 

The global NGP market is still in its infancy, worth roughly $4bn annually, according to Imperial’s analysis. If current trends continue, this market could grow to be a sizable $30bn by 2020 in the best case, according to management estimates.

If the company can capitalise on this growth, and see it filter through to the bottom line, I believe the stock is likely to re-rate substantially higher. Its long term average P/E is closer to 15, which implies a share price of 3,975p, up just over 50% from current levels. And in the meantime, while investors are waiting for a re-rating, the shares support a dividend yield of 7%, rising to 7.5% for 2019, according to the City’s projections.

A possible upside of 50%, coupled with a 7.5% dividend yield, are just two of the reasons why I’m bullish on this FTSE 100 income champion.

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.

Rupert Hargreaves owns shares in Imperial Brands and British American Tobacco. 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »