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This FTSE 100 stock’s slumped 20%! Should you buy its 13.5% dividend yield in an ISA?

Coronavirus fears still have stock pickers in defence mode. The FTSE 100’s still planted around recent 14-month highs and recent news flow suggests that another plunge lower could be around the corner.

But it’s not the only issue that threatens to punish stock markets in the coming days, weeks and months.

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Post-Brexit trade talks officially begin today between London and Brussels, a likely-bumpy process that could damage investor sentiment further. The threat of an epidemic also means that key European economies could fall into recession. And large question marks remain over the state of US and Chinese trade relations too.

Cheap

Footsie share Imperial Brands (LSE: IMB) has suffered badly in recent sessions. It shed a fifth of its value in February as the COVID-19 outbreak smashed market sentiment.

It’s possible that fresh falls could be around the corner, naturally. But could ignoring the tobacco titan at current prices be akin to looking the proverbial gift horse in the mouth? Right now it trades on a forward P/E ratio of 6 times and carries a 13.5% dividend yield for 2020.

Cigarette manufacturers like this were long considered the safe-haven stocks to buy along with utilities, defence and healthcare stocks. The addictive nature of tobacco products could be relied upon to keep growing annual earnings whatever the weather. What’s more, Imperial Brands’s industry-leading labels like Davidoff and Gauloises added an extra layer of strength to its profits visibility. So why does it continue to sink?

Cheerless

For its loyal customers, Imperial Brands’s cartons remain essential purchases, regardless of broader social, economic and political factors. The problem is that regulatory action has significantly shrunk the size of this group over the past decade.

Public smoking bans, and curbs on the sale and marketing of tobacco products across the globe have seen smokers turning their backs on Big Tobacco and discouraged young people from taking up the habit. The same health concerns over vaporisers (and similar products) have cast doubts around Imperial’s ability to offset a declining cigarette market too.

Set to keep sinking?

Last month’s financials illustrated the colossal difficulties the FTSE 100 stock faces. Then it said that net revenues would likely flatline in the current financial year (to September 2020) and adjusted earnings per share would likely fall.

The reason? Imperial Brands said that “the US FDA’s ban on certain flavours of cartridge-based vapour devices and weaker than expected consumer demand for vapour” would hit business in the near term. I’m not convinced that turnover will rebound any time soon either, given growing health concerns over the likes of its blu e-cigarette and the steady decline of its traditional tobacco market.

In this climate, it’s no surprise that investors looking for safe havens are buying other stocks. Annual earnings growth has steadily slowed in recent years. And City analysts expect profits to finally fall in fiscal 2020 (they predict a 5% drop). Imperial Brands has lost almost two-thirds of its value during the past three years. I fully expect it to keep sinking too.

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He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

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Royston Wild 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.