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Imperial Brands shares have fallen 45% in two years. Here’s what I’d do now

It’s fair to say Imperial Brands (LSE: IMB) shares have had a shocking run over the last two years. Back in late 2017, the shares were changing hands for more than 3,000p. Today however, Imperial’s share price stands at just 1,700p.

Personally, I’m down around 40% on my Imperial Brands holding (excluding dividends). It’s the worst-performing share in my dividend portfolio by a long way. That said, I’m not willing to give up on it just yet. Here are a few reasons I believe the FTSE 100 stock has the potential to rebound.

10% dividend increase

Firstly, while trading conditions have been challenging recently, the company’s full-year results, issued on 5 November, weren’t that bad in my view. For example, for the full year, tobacco and next-generation product (NGP) net revenue increased by 2.2%, while adjusted earnings per share only fell 1.6%. That’s certainly not a disaster.

Interestingly, the dividend was increased by another 10%, marking the 11th consecutive year of 10% growth. To my mind, this suggests management is not too worried about future profitability.

Insider buying

It’s also worth noting a number of top-level directors have purchased shares in the company recently. In late September, five of them, including outgoing CEO Alison Cooper, CFO Oliver Tant, and chairman Mark Williamson, added to their holdings, spending around £400,000 on stock. This suggests these insiders are confident about the future and expect the stock to recover.

More recently – and this is perhaps most interesting – Group Innovation and Science director David Newns bought £1.4m worth of stock on 14 November. Given that he’s likely to have a good understanding of the potential of Imperial’s new products, I see the fact he’s spending his own money on shares (and a lot of it too) as a good sign.

Woodford selling

I’ll also point out that Imperial’s recent share price weakness could be related to the liquidation of Neil Woodford’s Equity Income fund. We know that Imperial was a key holding for Woodford. With the £3bn fund now being wound up, BlackRock – who is responsible for selling all the holdings – will have needed to offload a significant number of IMB shares (potentially £100m+ worth), which will have put pressure on the share price. When the Woodford debacle is finally put to bed early next year, we may see IMB shares bounce.

Crazy valuation and yield

Finally, just look at the valuation and yield. Right now, IMB shares trade on a forward-looking P/E ratio of just 6.4 and sport a monster dividend yield of 12%. When you consider the median FTSE 100 forward P/E ratio is 15.5, and the median FTSE 100 trailing dividend yield is just 3%, those metrics seem crazy to me. Imperial’s dividend yield is four times the median Footsie yield!

All things considered, I believe Imperial Brands shares have the potential to rebound in the near future. For this reason, I think it’s worth holding on to the stock.

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Edward Sheldon 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.