In what I call the dangerous dog days of August, it’s been another week of snaking and twisting for the FTSE 100. As temperatures rose in this unrelenting heatwave, so did the FTSE 100.
Tricky times for the FTSE 100
History shows that the summer months are notable for producing lower and more volatile returns than winter. Indeed, there is a pronounced seasonal difference between lower May-October returns and higher November-April gains.
Last Friday, before this heatwave, the FTSE was languishing at 6,000 points. It rose strongly on Monday, Tuesday and Wednesday, closing at 6,280. That’s a near-4.7% gain in a few days, for no concrete underlying reason. There was no improvement in Covid-19 containment, no change to US-China relations, and no other news worthy of such an uplift.
We just have to acknowledge that, at this time of year, trading is thinner and liquidity reduced. This leads to stock markets moving up and down more readily, without any underlying justification. I guess this has been just another ‘risk-on’ week with more buyers than sellers.
A FTSE 100 share not for ethical investors
As a buyer of value and dividend shares, I welcome weaker share prices. That’s because lower entry costs mean bigger bargains and higher returns long term. For several months, I’ve had my eye on one FTSE 100 stock that has been in steep decline since late April.
The company with the dwindling share price is Imperial Brands (LSE: IMB). As a multinational tobacco company, this share is off-limits to ethical investors. But it’s a firm favourite among equity income funds and income-seeking investors.
Imperial: a long-term success story
Imperial is the world’s fourth-largest cigarette manufacturer, making over 320bn fags a year. Its famous brands include JPS, Gauloises and Winston cigarettes and Rizla papers, and it also makes cigars and tobacco. A long-established leader in its field, it has been going for 119 years.
Imperial is a huge business: it operates 50 factories, employs 32,000 people and sells to over 160 countries. Yet for nearly four months, its share price has headed relentlessly downwards.
Imperial shares have gone up in smoke
Yesterday, Imperial shares closed at 1,284.5p, down a further 33.5p (2.5%). The share has crashed almost two-fifths (38.8%) over the past year. Since Imperial shares hit a 52-week high of 2,256p on 12 September last year, they have fallen almost £10. Ouch.
As a result of these steep falls, a large chunk of Imperial’s market value has gone up in smoke (pun intended). Today, it is worth just £12.5bn, about 70% less than when its shares were riding high at 4,130p in September 2016.
A FTSE 100 share for dividend-lovers
It almost goes without saying that tobacco firms are in terminal decline. Perhaps that explains why this FTSE 100 share is just 3.7% above its 52-week low of 1,238.5p, set just six days ago (on 7 August).
Another reason for the recent weakness in the share price is the one-third cut in its dividend announced on 19 May. This slashed its next dividend to 41.7p from 62.56p a share. But that still implies an annual dividend of 137.7p, for a whopping dividend yield of 10.7%.
Reinvesting this double-digit, well-covered dividend yield into yet more shares would double your money every seven years. For me, this indicates that Imperial shares are a steal. I’d buy today and hold for the gushing river of cash dividends to come.
Cliffdarcy 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.