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Why I’m buying more of this 12%-yielding FTSE 100 dividend stock for 2020

Tobacco group Imperial Brands (LSE: IMB) has to be the most hated stock in the FTSE 100 right now. The shares have plunged in value this year as investors have used any excuse to sell their holdings. 

The stock entered the year trading at around 2,400p and it’s currently changing hands at around 1,675p, a decline of approximately 30% excluding dividends. The way I see it, there are several reasons why investors have been selling Imperial over the past 12 months.

Lack of leadership

For a start, it looks as if the business lacks direction. Imperial announced in February that its long-standing chairman, Mark Williamson was planning to step down. Then in October, CEO Alison Cooper, announced that she was going.

Management reshuffles like this aren’t that uncommon, but what is worrying is how long it took to find a replacement for Williamson. It took eight months for the group to announce its new chair, and analysts seem to think that it could take even longer to find a replacement CEO.

Indeed, the company hasn’t placed a timetable on Cooper’s departure, only saying that she’ll leave when “a suitable successor is found,” which suggest she was forced out before Imperial had time to lock in a replacement. 

Growth slowdown

As well as a lack of leadership, Imperial’s growth is slowing. The company had been expecting its so-called next generation (vaping and e-cigarettes) products to help it achieve revenue growth of 4% for the year to September 30 2019.

However, due to the backlash against vaping in the US, management revealed a 1.1% increase in revenues for the year. Adjusted earnings per share declined 1.6% in constant currency. 

Still, while the company might not be growing, it remains a cash machine. In its last financial year, Imperial generated a free cash flow of £2.8bn, more than enough to cover its dividend distribution of £1.85bn and pay down debt.

I don’t think this is going to change anytime soon. While Imperial’s management crisis and next-generation slowdown are worrying, its core business is still going strong. This means the company has time to put things right.

Growth in 2020

A lot hinges on the company’s ability to find a successor for Cooper. Many of Imperial’s leading shareholders have been crying out for change at the top for some time, and I think a new manager could restore the market’s confidence. Hopefully, we’ll have an announcement in 2020, and that’s why I’m buying more of this FTSE 100 dividend stock for next year.

At the time of writing, shares in Imperial are dealing at a forward P/E of just 6.2 and support a dividend yield of 12%. As I’ve said above, this dividend is well covered by free cash flow, so it looks safe for the time being. 

Further, Imperial’s peers are trading at an average P/E of 11, which suggests the stock is undervalued by around 40% at current levels. That’s why I think next year shares in Imperial will finally light up. 

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Rupert Hargreaves owns 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.