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This FTSE 100 share is down 60% in 5 years. I like the stock!

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As an old-school value investor, I often trawl the depths of the FTSE 100 index, looking for bombed-out shares. But, like Warren Buffett, I’m not looking for ‘cigar butt’ businesses with just one puff left in them before they die. Instead, I’m seeking ‘fallen angels’. These are solid businesses, perhaps facing real problems, but whose share prices are out of touch with reality. Ironically, one of these potential fallen angels is actually a leading tobacco company.

Imperial Brands: fallen angel?

Imperial Brands (LSE: IMB), known in the City of London as ‘Imps’, is the world’s fourth-largest tobacco company. It operates in 12o markets and employs 27,500 people. Its portfolio of cigarette brands includes Davidoff, Gauloises, JPS and West, plus Winston and Kool in the US. Obviously, being in the cigarette/tobacco business makes this FTSE 100 stock a no-no stock for ethical and environmental investors.

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Furthermore, smoking is on the decline in the developed world, with only one in seven (14.1%) British and American adults being regular smokers. But smoking is addictive, which is why customers remain loyal to certain brands. Also, smoking is still highly prevalent in developing countries, with China being the #1 market. And, much to my regret, I have been a cigarette smoker for almost 35 years. That’s why this FTSE 100 firm catches my eye.

The IMB share price goes up in smoke

Based in Bristol, England, Imperial has been around for 120 years. It makes cigarettes and tobacco products in 38 factories worldwide, selling 330bn cigarettes a year in more than 160 countries. But this FTSE 100 share has crashed since 2016. In September 2016, the Imperial brands share price topped out at 4,130p. It then went into steep decline over the next two years, closing 2019 at just 1,869p. Despite selling a consumer staple, the Imps share price collapsed with the rest of the FTSE 100 in ‘Meltdown March’. On 23 March 2020, IMB closed at 1,276.4p, down nearly seven-tenths (69.1%) from its 2016 high.

This FTSE 100 share is down 60% in five years

On Friday, the Imperial Brands share price closed at 1,486.5p, down almost three-fifths (59.1%) over the past five years. This makes IMB the second-worst performer of 97 stocks in the FTSE 100 for the full half-decade. Despite this huge decline, Imps still has a market value above £14bn.

What would convince me to buy this FTSE 100 stock today? The first attraction is a price-to-earnings ratio of 9.4 and an earnings yield of 10.6%. Imperial also generates huge cash flows, allowing it to pay massive quarterly cash dividends. Right now, IMB has a dividend yield of 9.26% a year, which translates into a quarterly passive income of 2.32%. This makes Imps one of the top-three dividend payers in the entire Footsie. And this income would be completely tax-free inside an ISA.

Of course, there are lots of reasons not to buy into this FTSE 100 stalwart. Its products are harmful to health and kill some users. Tobacco smoking is in long-term decline, especially where cannabis is legal. Also, Imperial’s net debt easily exceeds its market value (but it does have a solid credit rating). Yet as an income investor, I like the stock. That’s why I’d buy while the Imperial Brands share price languishes at current levels.

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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.

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