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Have £1,000 to invest? I’d check out this 7% yielding FTSE 100 bargain for a stocks and shares ISA

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I have found a plethora of top FTSE 100 companies I think are trading at bargain valuations while dishing out generous dividends right now.

These two big name blue-chips both yield more than 9%. Alternatively, here’s a couple more FTSE 100 dividend stars, each yielding more than 10% and trading at a discount.

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Imperial might

Recent stock market volatility has driven share prices down and yields up, creating bargains galore for long-term investors who can withstand short-term share price swings. Tobacco giant Imperial Brands Group  (LSE: IMB) is another tempting opportunity.

It currently trades at just 10.1 times earnings while offering a juicy forward yield of 7%, more than eight times the average cash ISA, which currently pays just 0.85%. The dividend is covered 1.4 times by earnings which is pretty solid, although of course, stocks are inherently riskier than cash.

Brands power

Where Imperial Brands has disappointed is share price growth, with the stock down 30% in the last two years. Over five years, it has grown just 15%. Big tobacco is traditionally seen as a defensive sector but may offer less protection than before, as the war on smoking continues.

And now regulators are looking to crack down on vaping, which they view as a backdoor route to nicotine addiction. Last month, Imperial Brand’s Fontem Ventures vaping initiative, whose brands include blu and Reon, was one of 21 manufacturers of electronic cigarettes to receive a letter from the US Food and Drug Administration. The FDA wants to see “robust” plans to curb the rise in youth vaping, backed by threats to remove the products from the shelves.

Lower volumes

You can decide for yourself whether you want to invest in this industry, but if you do, you will be interested to know that Imperial Brands recently reported that it is on track to hit revenue and earnings growth targets in the year to 30 September, as stronger pricing offsets slightly weaker tobacco volumes.

Big tobacco is undoubtedly in retreat. Imperial Brands highlighted a 2.1% fall in tobacco sales volumes in the six months to 31 March but this looks comparatively good against a drop of 5.7% across the industry. Naturally, it is cutting costs too, with savings expected to top its original £100m target. The group is also pinning hopes on its planned heat-not-burn tobacco product which should be launched early next year and is supposed to emit fewer poisonous fumes.

Lighting up

Earnings growth is expected to be flat in the year to 30 September 2018, then pick up by 3% the following year. By then, the dividend is expected to stand at 203.81p per share, against earnings per share of 275.86p, giving ample cover of 1.35. At that point, the yield is forecast to hit an even dizzier 7.6%. 

Management is working to drive down net debt which stood at £12.7bn at 31 March. This is a reduction from £13.9bn one year earlier and a fraction of rival British American Tobacco’s hefty £45.7bn debt pile. Imperial Brands still generates plenty of cash and its dividend payout looks more secure than many of those other FTSE 100 high-yielders to me.

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harveyj has no position in any of the shares mentioned. 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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