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Yielding almost 9%, this FTSE 100 dividend stock still looks a bargain to me

The return of volatility in the markets over the last couple of days — thanks largely to the ongoing trade dispute between the US and China — should matter little to Foolish investors, particularly those concerned with simply generating an income from their portfolio. 

That’s why, today, I’m ignoring whatever President Trump does or does not do and concentrating on the latest set of interim results from tobacco giant and FTSE 100 constituent Imperial Brands (LSE: IMB).

Before markets opened this morning, the £22bn cap was forecast to return a monster 8.7% in 2019 — a yield so large that it would be natural to question whether a cut to the payout is only a matter of time.

Personally, I continue to regard Imperial as something of a top-tier bargain for dividend hunters. 

“Significant progress”

Despite a 6.9% reduction in tobacco volumes (something the company attributed to shipment timings in addition to lower demand), revenue rose 2.3% to just under £14.4bn over the six months to the end of March. 

The company also posted a 38.1% rise in operating profit to £1.15bn over the period, due in part to the rise in popularity of Imperial’s next-generation products.

Revenues from this part of its business came in at £148m — a rise of 245% on that achieved one year ago, highlighting just how popular tobacco alternatives like vaping are becoming. 

Commenting on today’s results CEO Alison Cooper stated that the business had made “significant progress” in growing this part of the business, “resulting in leading retail shares in most markets“.

Indeed, Imperial’s Blu is now the leading vape brand in the UK, France, Italy, Germany, Spain and Japan, at least according to the company.

In addition to remarking that it would be building on this momentum in the second half of its financial year (supported by ongoing investment as a result of £60m of cost savings elsewhere), Cooper also remarked that the company was “on track” to meet its full-year expectations.

Revenue is now expected to grow “at or above” the 1%-4% range expected. A “much stronger second half” is also predicted for the company’s tobacco products.

Simply too cheap?

Despite a negative reaction from the market, today’s numbers from Imperial are far from the stuff of nightmares, at least in my opinion. As I see it, the risk/reward trade-off looks sufficiently enticing to get involved.

Notwithstanding the dwindling popularity of traditional tobacco products, the shares continue to look (too) cheap on conventional valuation measures. 

Having almost halved in value from their 4,000p+ peak in August 2016, they now change hands at a little under 9 times forecast earnings.

When you consider that Imperial’s annual returns on capital employed have been consistently higher than many companies in the FTSE 100, that looks a good deal.

And then there’s that dividend yield.

While it’s true that the payout is high, today’s 10% hike to the interim cash return (to 62.56p) and Imperial’s history of strong cash-generation suggest investors shouldn’t worry too much. There are stocks in the top tier where things look far more precarious. 

Even if payouts were to be reduced at some point, I’m confident the shares would still be worth owning.

Buying Imperial within a highly-concentrated income portfolio is arguably too risky. But as part of a suitably diversified portfolio of 15-20 stocks in different sectors? That still makes a lot of sense to me.

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Paul Summers 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.