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A dirt-cheap FTSE 100 dividend stock with a bigger yield than BT

I recently suggested that telecoms giant BT Group (LSE: BT-A) could be the buy of the decade. But there’s no doubt in the short term, BT faces some tough challenges.

One particular risk for shareholders is that the mobile and broadband firm’s 6.7% dividend yield could be cut.

My first pick today is a FTSE 100 firm that offers a forecast dividend yield of 8.5%. Despite this super-high yield, I think a dividend cut much less likely than at BT.

A cash machine

The company concerned is tobacco group Imperial Brands (LSE: IMB). The shares are out of favour at the moment, due to concerns about regulatory risk and the ongoing decline in tobacco smoking.

However, Imperial’s recent financial performance suggests to me that these concerns may have been overdone. The firm’s latest trading update confirmed previous forecasts for earnings growth of between 4% and 8% this year.

This stable performance should be backed by strong cash generation. This is the secret to the appeal of Imperial’s dividend. For various reasons, the group’s free cash flow is generally higher than its accounting profits.

What this means for investors is that dividend cover by free cash flow is generally stronger than the firm’s earnings per share might suggest. Last year, my sums show that the dividend was covered 1.4 times by surplus cash, allowing the group to repay some debt as well.

Simplifying the business

In the past, Imperial’s borrowings have concerned me. But net debt is falling gradually and the group is planning to speed up the process with up to £2bn of non-core asset sales over the next couple of years.

One business that’s up for sale is the group’s premium cigar business. As a luxury business, I feel that this could attract a strong valuation, even in a weak market for tobacco generally.

I’ve bought Imperial Brands for my portfolio. With the shares trading on nine times forecast earnings with a well-supported 8.5% yield, I reckon they’re a good income buy.

Another bargain sin stock?

In January, I suggested that FTSE 250 pub operator Greene King (LSE: GNK) was a potential bargain. But since the start of September last year, the pubco’s share price has risen by about 35%.

The shares don’t look as cheap as they did. So is Greene King still worth buying?

The Suffolk firm issued a trading update on Tuesday confirming strong trading for Easter. Like-for-like sales rose by 2.9% during the year to 28 April and were 4.6% higher over Easter.

My reading of this announcement suggests that full-year results should be broadly in line with City forecasts, but the shares still fell by about 7% following the news.

A flat pint?

Why did Greene King’s share price fall so sharply? One reason may be that the price has got ahead of itself.

Although I think this is a solid business with good long-term potential, the UK pub market is mature and competitive. Costs are fairly high and regular investment is needed to keep pubs up to date.

This is not a growth business. Although I thought the shares looked cheap in October and January, I’m not sure they are now.

Tuesday’s fall has left Greene King trading on 10 times forecast earnings, with a 5.2% yield. With profits expected to be flat during the year ahead, I think that’s high enough. I’d hold.

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Roland Head owns shares of BT GROUP PLC ORD 5P and 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.