It’s fair to say that my investment in the tobacco stock didn’t go to plan. Since I bought the shares, Imperial Brands’ share price has been stuck in a rotten downtrend.  A few weeks back, I finally decided to cut my losses and sell my Imperial Brands shares.

Here, I’ll explain why I sold the stock and highlight the lessons I learnt from this poor investment.

Imperial Brands shares: I’ve sold

One of the reasons I first bought Imperial Brands shares was I thought the valuation was attractive. Today, I still think IMB’s valuation is attractive. Currently, the stock trades on a forward-looking P/E ratio of just 5.5. 

The problem is, however, I’m struggling to see anything on the horizon that might result in a re-rating of the valuation. You see, since I bought the shares, sustainability has become far more of a focus in the investment management world. These days, nearly all institutional investors are turning to their attention to ESG investment strategies.

As a result, big investors are increasingly avoiding sectors such as Tobacco. This means that, going forward, tobacco stocks may not generate the same kind of interest from institutional investors they did in the past. This could potentially keep Imperial Brands’ share price depressed.

Challenging conditions

Another issue that concerns me is the amount of regulation that tobacco companies are currently facing. Of course, government regulation in the space is nothing new. However, recently, governments seem to be cracking down on tobacco and other related products harder.

For example, just recently in Spain, the Health Department announced it wants to raise tax on tobacco products in order to reduce cigarette consumption. Meanwhile, Australia is looking at banning the import of all e-cigarettes and refills containing nicotine.

These kinds of new regulations are going to continue to make life hard for sector companies such as Imperial Brands.

Dividend cut

Finally, another reason I sold my Imperial Brands shares was that the company recently cut its dividend by 33.3%. Before this cut, I saw Imperial as an attractive dividend stock. The company had notched up an impressive dividend growth track record and the yield was attractive.

However, this dividend cut changes things for me. Once a company has cut once, you often see more cuts down the track. With a new CEO coming in, I wouldn’t be surprised if the company reduces its dividend again in the near future.

Lessons from this investment

Did I learn anything from losing money on Imperial Brands shares? Absolutely.

The key takeaway for me is, don’t buy a stock just because it’s cheap and offers a big dividend yield. Cheap stocks can get cheaper. And a high yield is often a sign the market doesn’t think it’s sustainable. I should have listened to what the market was saying.

Ultimately, this investment was a good reminder of the importance of focusing on a company’s growth prospects. Focusing on high-quality stocks with long-term growth potential is generally a more sensible strategy than buying stocks just because they’re cheap.

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Edward Sheldon has no position in any 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.

In spite of this healthy rise, I still think the stock offers considerable value. Before explaining why, let’s take a look at the most important numbers from today’s statement.

Back on track

Revenue increased 4.1% to £12.1bn at constant currency rates over the first six months of 2019, with growth elsewhere more than offsetting the 3.5% decline in cigarette volumes seen over the period. 

It’s particularly worth highlighting the 27% rise in sales of the company’s ‘New Categories’ products (to £531m) since it’s this part of the business that will play an increasingly important role in British American’s ability to continue raking in cash going forward.  

Broken down, sales of Tobacco Heating, Vapour and Modern Oral products rose 4% (£301m), 58% (£183m) and 284% (£47m) respectively. With further launches planned in H2, British American believes it’s now back on track to hit the middle of its targeted 30%-50% growth range in this area.

Despite increased investment in these new products, adjusted operating profit was also up 5.9% at constant currency to £5.21bn. Encouragingly, this number was a slight beat on the £5.14bn expected by analysts.

Still cheap

Considering the above, it’s perhaps no surprise that the shares were up over 6% this morning. That’s not to say, however, that prospective investors should worry about missing the boat. Even after taking today’s gain into account, the stock is still around 40% lower in price than it was a couple of years ago.

I think the market is too pessimistic on British American. A price-to-earnings (P/E) ratio of just 9 at yesterday’s close is far below its five-year average valuation of 16.5. Having said that, it’s now targeting “high-single-figure adjusted earnings growth” for the full year, I’m wondering if today’s rise may be the beginning of a sustained (albeit very gradual) recovery. 

Let’s not forget British American’s income credentials either. A proposed 203p per share total dividend in 2019 gives a yield of 6.5%. That’s clearly way higher than the 4% median across the index, but not so high that a cut looks likely, at least for now. Since it remains confident of generating more than £1.5bn in free cash flow in 2019 even after the payment of dividends, I think those invested purely for the quarterly cash payouts can sleep soundly.

While the decline of traditional smoking continues in the West, it’s also worth remembering that approximately 1.1 billion people in the world still engage in the habit and that numbers are actually increasing in some countries due to population growth. This surely makes companies like British American far more defensive than your typical technology play whose clients will quickly move on to different products or services at the drop of a hat.

Of course, there are still challenges ahead.

For one, the rising popularity of next-generation products won’t be going unnoticed by the US Food and Drug Administration. In addition to the likelihood of further regulation, the FTSE 100 member must contend with competition from rivals such as Philip Morris whose recent shipment volumes have been better than those reported today.

Nevertheless, based on these half-year numbers and its lowly valuation, I continue to be bullish on British American’s future.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Shares in the two main UK-listed tobacco companies have fallen by about 20% over the last year, even though their profits have remained stable.

My top pick from this sector is FTSE 100 firm Imperial Brands (LSE: IMB), which is now trading with a 2019 forecast dividend yield of 9.9%. In this article I’m going to take a look at the risks and potential rewards for investors and explain why I’ve recently bought more shares in this company.

What could go wrong?

When the market prices a profitable FTSE 100 stock with a 9.9% dividend yield, the message is unmistakeable: this payout may not be sustainable.

So why might Imperial boss Alison Cooper be forced to cut the dividend? I can see a couple of reasons.

Smoking decline: Tobacco stocks fell suddenly at the end of May after reports that US smoking rates were falling faster than expected.

Imperial says that the rate of decline this year is expected to be 4.5% to 5%, broadly unchanged. The firm says it’s gained some market share over the last six months. It’s hard to say at what point declining smoking volumes will start to hit profits — a lot depends on the uptake of new alternatives such as vaping and on smoking rates in emerging markets.

Debt: Imperial has a lot of debt — net debt was £13bn at the last count. Although interest costs and the dividend have been consistently covered by free cash flow in recent years, the firm’s generous payouts haven’t left much capacity for debt reduction.

This has now become a key area of focus for the firm, which is aiming to raise £2bn through asset sales by May 2020. So far, progress has been limited. The latest results show that just £280m from divestments. However, press reports have suggested that IMB’s premium cigar business, which is currently for sale, could fetch upwards of £1bn.

The May 2020 deadline is significant because the group has more than £7bn of debt that will need to be repaid or refinanced between May 2020 and May 2022. I suspect Ms Cooper is keen to reduce the group’s borrowing levels before that time, in order to cut borrowing costs and protect the group’s investment-grade credit rating.

Why I’ve been buying

There are some valid reasons to be cautious about investing in Imperial. But I think that there’s a good potential opportunity here.

In the meantime, sales of next-generation products such as blu vapes rose by 245% to £148m during the six months to 31 March. Rising revenue from such products is now starting to offset falling revenue from tobacco.

Operating profit margins for the group remain high, at more than 30%. With the shares now trading on just 7.5 times forecast earnings, I think a lot of the risks are reflected in the price. Even if the dividend is cut, it’s worth remembering that a 50% cut would still give a yield of almost 5% — above the FTSE 100 average of 4.5%.

In the meantime, IMB’s 9.9% yield has a firm place in my portfolio. I continue to view the shares as an income buy.

The post Yielding almost 10%, I think this FTSE 100 dividend stock is too cheap appeared first on The Motley Fool UK.

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Roland Head owns shares of 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.

Over the last two years, British American Tobacco (LSE: BATS) shares have fallen 49%, while rival Imperial Brands (LSE: IMB) is down 46%. These are no doubt large falls, particularly when you consider that, only a few years ago, both stocks were considered to be dependable blue-chip dividend stocks. 

To offset the decline in cigarette volumes,  both FTSE 100 companies have been developing new innovative products that are considered less harmful to consumers, such as tobacco heating products and vapour products. BATS has its portfolio of ‘potentially reduced-risk products’, while Imperial has its portfolio of ‘next-generation products’. Both companies are seeing good results here, even if progress is a little slow.

However recently, I’ve been wondering if a different product is actually the long-term solution to the tobacco giants’ woes. I’m talking about cannabis.

Attitudes towards cannabis are changing

Now, that may sound crazy at first. After all, here in the UK, cannabis is illegal. Yet around the world, attitudes towards its use are changing dramatically.

For example, just look at the US, where the cannabis industry is booming. There, 10 states have legalised recreational marijuana use, while 33 states have legalised medicinal use. Meanwhile, in Canada, recreational and medicinal cannabis are legal across the whole country.

There are also a large number of countries within Europe that have legalised cannabis for medical use. These include Switzerland, Portugal, Italy, and Germany. Having long been considered a taboo industry, cannabis is clearly going mainstream.

Mega market

And it’s a massive market. While global sales are expected to come in at around $17bn this year, according to some analysts sales could potentially grow to over $150bn in the years ahead. To put that number in perspective, British American Tobacco generated sales of around $32bn last year. If tobacco giants are looking for a genuine growth driver, cannabis could the solution.

It’s already happening

What I think is interesting about this is that tobacco companies are already testing the cannabis market.For example, US tobacco group Altria – the owner of Marlboro cigarettes – recently splashed out $1.8bn to acquire a 45% stake in cannabis stock Cronos, with the ability to exercise warrants that could up its stake to 55%.

Closer to home, Imperial Brands announced last year that it had made a small investment in UK biotech company Oxford Cannabinoid Technologies (OCT) through a subsidiary. Imperial CEO Alison Cooper has said that cannabis is “an interesting place to explore.” It’s early days, yet there definitely appears to be some interest in this burgeoning sector from the tobacco companies.

Watch this space

Ultimately, I think the tobacco/cannabis story is worth following closely. FTSE 100 tobacco stocks aren’t going to turn into cannabis stocks overnight. However, I’m convinced cannabis could potentially provide another growth angle for the tobacco giants in the future. As a result, I wouldn’t write off British American Tobacco or Imperial Brands just yet.

The post British American Tobacco and Imperial Brands: could this be the future? appeared first on The Motley Fool UK.

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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.

Imperial Brands

Let’s start with tobacco manufacturer Imperial Brands (LSE: IMB). It’s perhaps not a stock for everyone given its ‘sin stock’ attributes, yet in the current low-interest-rate environment, I think IMB is hard to ignore given its dividend yield of 7.8%.

I last covered IMB in mid-January when its share price was 2,400p. At the time, I said I’d buy the stock while it was cheap. Since then, the shares have climbed 9.4%, which is a good return in two-and-a-half months. Yet at the current share price, I continue to see a lot of value on the table as the stock’s forward P/E is still under 10.

The thing about stocks is that they can trend way too far in both directions. Often, a stock, sector, or index will climb far too high as investors get overly excited about its future prospects, before crashing far too low as investors panic. And I think that’s what we’ve seen with the tobacco sector in recent years. Go back to mid-2016 and tobacco stocks were sporting P/E ratios in the low-to-mid 20s. That was too high in hindsight. Yet now, IMB and BATS both trade on P/Es under 10. I see that as too cheap and personally think that a P/E of 12 to 16 is fair for these kinds of dividend-paying stocks.

Interestingly, Citigroup just upgraded UK tobacco stocks to ‘buy’, stating: “The shares could still rise a long way because we think the environment will continue to look less threatening.” The broker also upgraded its price target for IMB from 2,700p to 3,000, implying 14% upside.

Yes, there are risks to investing in the tobacco sector. Smoking rates are declining and increasing regulation adds uncertainty. Yet ultimately, I think that IMB has been beaten down too far and that at current levels, the stock offers the potential for capital gains as well as big dividends.

Smurfit Kappa

Another sector that has been beaten down too far in my view is packaging. Concerned about the possibility of a global recession, investors have dumped high-quality packaging stocks in recent months and I think this has created compelling investment opportunities.

One FTSE 100 packaging stock that I like right now is Smurfit Kappa (LSE: SKG) – a leading provider of corrugated packaging with a focus on sustainable products. In my view, the shares look very cheap at present.

This year, analysts expect SKG to generate earnings of €2.97 per share, which at the current price, puts the stock on a forward P/E of just 8.75. That kind of valuation provides a nice margin of safety for investors in my opinion. A prospective dividend yield of 3.8% looks attractive too, and it’s worth noting that the dividend payout is expected to be covered by earnings nearly three times.

SKG released full-year results in mid-February and the numbers looked decent. Revenue increased 4%, pre-exceptional earnings per share surged 58%, and free cash flow increased 61%. Moreover, management hiked the dividend by 12%.

Overall, I see a lot of value here and think that Smurfit Kappa could reward investors with capital gains and solid dividends going forward.

The post 3 days until ISA deadline. 2 FTSE 100 dividend stocks I’d buy today appeared first on The Motley Fool UK.

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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.

However, for those willing to look beyond the short-term uncertainty, I believe there are plenty of attractive opportunities in the FTSE 100 right now, particularly from a dividend-investing perspective. Here’s a look at two cheap dividend stocks that I believe offer strong value right now.

ITV

ITV shares have performed poorly over the last six months, falling from around 175p, to 136p today. Investors have dumped the stock on concerns that advertising revenues could decline if UK economic conditions deteriorate after Brexit, as ad spending is generally linked to economic growth. Yet I see the recent share price fall excessive, as the shares now trade on a P/E ratio of just 8.8 (using consensus FY2018 earnings) and the yield on offer is nearly 6%. I believe the stock offers turnaround potential at current levels.

One thing to understand about ITV is that the company is no longer totally reliant on advertising spending for revenue. In recent years, the group’s content division, ITV Studios, has made a meaningful contribution to the company’s top line. Looking ahead, I believe this division should be able to provide a buffer if advertising revenues do decline due to Brexit. Just recently, ITV announced that Studios revenue had grown 10% for the first nine months of the year, including organic revenue growth of 7%, which is a healthy level of growth.

Even if growth is lacklustre in the short term, the company’s high dividend yield means investors will be paid to wait things out. In July, it advised that investors can expect a payout of at least 8p for FY2018, which translates to a yield of 5.9%. Given that generous yield, I think ITV shares are certainly worth considering right now.

Imperial Brands

Another FTSE 100 stock I believe offers fantastic value at the moment is tobacco manufacturer Imperial Brands (LSE: IMB). The entire tobacco sector has been out of favour with investors for around 18 months now and, as a result, Imperial’s share price has fallen from 3,500p to 2,400p. Yet, at the current share price, Imperial trades on a forward P/E of just 8.7 and offers a prospective dividend yield of a colossal 8.5% – metrics which are hard to ignore, in my view.

One reason why tobacco stocks have fallen is that investors are concerned about declining smoking rates. I understand the concern here. However, I also think the fears are overblown. For starters, the pace of decline is slowing, according to the World Health Organisation (WHO). And with Asia and Africa experiencing rapid population growth, the number of smokers in these countries is forecast to offset declining smoking rates across developed countries.

Secondly, at some stage in the future, I think cannabis could provide an alternative growth angle for tobacco companies. This is a huge growth market, and it’s worth noting that last year, Imperial took a small stake in UK biotech company Oxford Cannabinoid Technologies. Moreover in September, Imperial CEO Alison Cooper told Bloomberg that cannabis is “an interesting space to explore.”

So, I wouldn’t write off Imperial Brands just yet. With the shares trading so cheaply right now, I think they’re worth a closer look.

The post Two FTSE 100 dividend stocks I’d buy while they’re cheap appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in ITV and Imperial Brands. The Motley Fool UK has recommended Imperial Brands and ITV. 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.

Encouraging progress

Wednesday’s first-half results gives me confidence in the company’s ability to weather structural headwinds facing the tobacco industry. Although adjusted operating profit fell by 2.2% in constant currency terms, it exceeded analysts’ expectations, as cigarette volumes declined slower than expected and the company achieved higher prices over the period.

Management actions to more effectively allocate capital are also beginning to show signs of progress, after a £2bn disposal of non-core tobacco products in the US and a fall in adjusted net debt to £12.7bn. It also said its cost optimisation programme is on track to deliver £100m of annual savings in the full year.

At the same time, Imperial Brands continues to invest in next generation products. It’s seeing encouraging growth in its vaping business and has a strong pipeline of exciting new products, which could be brought to market in the coming year.

Valuations

Sure, concerns about a stricter regulatory environment and the long-term decline in the smoking population will continue to put off some investors, but I believe much of these risks are already priced into its shares.

Although these structural headwinds will likely slow earnings growth going forward, I reckon management actions and growth in next generation products will offset much of the impact. The company is doing better than its competitors in many of its key markets, with volumes declining at a slower pace than the industry as a whole and the company gaining market share — yet valuations for the group remain at a substantial discount to its peers.

With shares in the company trading at 9.7 times their expected earnings this year, they’re also trading well below their 5-year historical multiple of 13.3 times forward earnings.

Improving confidence

Looking elsewhere, Saga (LSE: SAGA) is another company to keep your eye on. Shares in the over-50s travel and insurance group have rebounded strongly in recent weeks as travel sales continue to offset much of the slack from its insurance business.

Despite intensifying competitive pressure in the home and motor insurance markets, the group is optimistic about its longer-term prospects — so much so that the board raised its full-year dividend payout to 9.0p.

Major shift

Saga has been undergoing a major shift in its business model. The company is moving away from riskier and more capital-intensive underwriting towards a ‘pure’ broking service, but the shift has not delivered the profit uplift expected by the company.

The transformation in its business model may still make sense for the group in the long term, as it frees up capital and enables the firm to focus on marketing its products. Saga has recently launched its membership scheme, which is showing good initial momentum in new business volumes.

This new membership scheme rewards customer loyalty and aims to reduce churn-rates and enhance cross-selling opportunities. It’s part of Saga’s attempts to reinvigorate the brand and make it more relevant in today’s over-50s market.

It’s still too early to say whether these initiatives will deliver a lasting improvement to its performance. Valuations remain undemanding, however, with shares trading at a forward P/E of 10.2.

The post Has Imperial Brands’ share price finally turned a corner? appeared first on The Motley Fool UK.

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Jack Tang 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.

Multiple headwinds

However, investors may be discouraged from buying its shares as the company is exposed to growing regulatory challenges and a series of headwinds. Amid stricter packaging rules, aimed at reducing the appeal of tobacco products, rising taxes and proposed new rules to limit nicotine content in cigarettes, tobacco companies face an uphill struggle to deliver continued earnings growth.

Currency headwinds are also a concern for Imperial as the strengthening value of the pound is expected to reduce net revenue and adjusted profit by about 3.5% in the first-half and between 2.5% and 3% for the full year. And all this comes while the company is having to deal with the long-term structural decline in volumes as the smoking population shrinks.

Maintains guidance

On the upside, very little of this is showing up in its financial performance. Profits have continued to grow and only a week ago, the company reassured investors that it was still on track to meet its full-year guidance for constant currency net revenue and earnings. This was in spite of the impact of regulatory changes, excise increases in France and the collapse of UK wholesaler Palmer & Harvey.

Volumes, although still declining, have held up better than its industry peers, leading to steady market share gains for Imperial. What’s more, Imperial’s cost savings programme continues apace, yielding better than expected results, with realised cost savings of £130m in 2017 bringing the cumulative cost savings to £370m.

Out of favour

Elsewhere, retail real estate investment trust Hammerson (LSE: HMSO) also offers exciting dividend growth potential.

Although UK commercial property remains an out-of-favour asset class, investors should not overlook the sector as a source of reliable income. Hammerson, which focuses on investing in top tier premium shopping centres, continues to achieve record leasing activity as rents and vacancy rates continue to hold up well.

The REIT has been an impressive dividend grower in recent years, as dividends per share have increased by a compound annual growth rate (CAGR) of 8.5% over the past half-decade. With the company expected to pay a total dividend of 25.5p this year, Hammerson has a prospective dividend yield of 5.5% at its current share price.

Intu merger

Looking ahead, there’s the prospect for further upside coming from its acquisition of Intu, its smaller rival. Hammerson has made a £3.4bn all-share offer for Intu, in a deal which values the smaller company at a 33% discount to its net asset value. As such, the acquisition is expected to be accretive to earnings per share in the first full year following completion.

Hammerson also expects to reap significant synergy benefits, by leveraging Intu’s online experience and the combined company’s enlarged scale to provide opportunities to drive footfall and improve its pricing power with tenants. Going forward, Hammerson anticipates that the dividend growth of the combined company will be at least in line with Hammerson’s historical dividend growth.

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Jack Tang has no position in any 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.

Why the fall? Well, there have been several drivers. One was the FDA’s announcement in July that it wants to cut nicotine levels in cigarettes. More recently, the CEO of larger rival Japan Tobacco stubbed out talk of a potential acquisition.

The last time Imperial shares changed hands at this level was mid-2015. That leads me to believe that the shares now offer a compelling opportunity for dividend investors. Here are a few reasons why.

6.2% yield

Let’s start with the prospective yield for FY2018. At 6.2%, this is one of the highest in the FTSE 100. Occasionally, a high yield can signal trouble. You have to be a little careful as a dividend cut could be on the horizon. Yet, in Imperial’s case, this does not appear to be the case. In my view, the stock just looks genuinely oversold.

Dividend growth

One reason I believe Imperial’s payout isn’t at risk is the company’s recent dividend growth. In November, Imperial raised its dividend by 10%. To my mind, that’s a signal of confidence from management.

If companies anticipate tough times ahead, they often freeze their payments, or limit growth to a few percent. For example, both Royal Dutch Shell and HSBC have frozen their payouts in recent years. In contrast, a 10% dividend hike suggests management believes the outlook is positive. Furthermore, the company reiterated in November that it plans to keep increasing its payout by 10% per year in the medium term so expect more growth ahead.

Coverage

Imperial’s dividend coverage looks satisfactory for now. The payout ratio last year was 64%. With analysts forecasting earnings of 263p per share for FY2018, cover is expected to be around 1.4 times. While that’s not a high ratio (ideally it would be closer to 2), it’s also not one to be particularly concerned about.

Valuation

The stock’s valuation also looks extremely attractive right now. Imperial’s forward-looking P/E is just 11.5. In contrast, rival British American Tobacco has a P/E of 16.1. Neil Woodford believes the valuation is unjustified, recently stating that the current share price “just looks like the wrong price.” The portfolio manager has been adding to his holding recently, as have I.

Risks

Of course, shares in Imperial Brands aren’t without their risks. One such is the threat of government regulation. Another is the long-term decline in smoking rates.

Yet for now, Imperial is still generating plenty of cash flow and its dividend looks safe. The best time to buy high-quality companies is when they’re out of favour. In Imperial’s case that’s now, in my view.   

The post Is Imperial Brands plc the best dividend stock in the Footsie right now? appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Imperial Brands and Royal Dutch Shell. The Motley Fool UK has recommended HSBC Holdings, Imperial Brands, and Royal Dutch Shell B. 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.

Moves to simplify its product portfolio and to concentrate on these so-called Growth Brands is keeping Imperial Brands’ revenues on an upward tilt as its cartons grab share from smaller rivals.

Bubbly growth

But the evergreen appeal of its sticks is not the only reason for investors to expect earnings, and consequently dividends, chugging higher, as the London company flings wads of cash at fast-growing markets like e-cigarettes and caffeine strips.

During the 12 months to September 2017 Imperial Brands is anticipated to generate earnings expansion of 9%, and to follow this up with a 5% rise in 2018. These readings create P/E ratios of just 14.1 times and 13.4 times respectively, nestling below the British blue-chip forward average of 15 times.

And Imperial Brands’ bubbly growth prospects are expected to translate into tastier dividends, not surprisingly. A payment of 173.8p per share anticipated for the present period yields 4.5%, while the figure moves to 4.9% for 2018, thanks to an estimated 188p dividend.

Top value

Communisis (LSE: CMS) has seen its share price continue to gallop higher in recent weeks, the stock rising 23% in value since the turn of the year alone and hitting record tops of 56p earlier in March.

The marketing ace pumped to those peaks after announcing that total revenues edged 2% higher during 2016, to £361.9m, with profit before tax jumping 15% to £16.7m.

Despite its sustained skywards share price charge, however, Communisis still offers splendid value for money in my opinion.

While the business is anticipated to endure a 5% earnings fall in 2017, Communisis is expected to bounce back with a 5% rise in 2018. And these predictions result in P/E ratios of 9.3 times and 8.9 times respectively, scandalously-low valuations in my opinion, given the communications play’s rising success with huge clients across the globe.

Big player

Communisis inked new deals with the likes of HMRC and Sony last year alone, and already counts the likes of Lloyds, Amazon and BP amongst its customer base. The company now sources just over a quarter of all revenues outside the UK, versus 18% just a year ago, and is poised to establish a base in the US this summer to boost trade in the world’s number one economy.

And I believe Communisis’s super growth outlook should keep dividends shooting northwards well into the future, helped by its ability to chuck out heaps of cash — free cash flow rose 7% last year to £12.9m.

In the meantime, projected payments of 2.6p per share for 2017 and 2.7p for next year should sate the needs of yield-hungry investors. These figures yield 4.8% and 5%, respectively.

The post 2 great value dividend shares for your ISA appeared first on The Motley Fool UK.

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Royston Wild has no position in any 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.