Last year was a huge disappointment for investors in Imperial Brands (LSE: IMB). The company’s share price declined by over 10% at the same time as the FTSE 100 increased by 7%. However, its fall was less to do with its own performance, and more down to the attitudes of investors. More bullish outlooks on the future of the global economy meant that defensive stocks such as those in the tobacco sector failed to keep up with the wider index.
Investment opportunity
The lack of interest in defensive stocks such as Imperial Brands means that there could be a buying opportunity on offer. The company’s operational and financial performance remains sound even though cigarette volumes are continuing to decline. Increasingly restrictive regulations across the world and a more health-conscious consumer mean that demand for tobacco products is set to decline further. However, at the same time there is increasing demand for next-generation products such as e-cigarettes.
Within the next-generation products arena, Imperial is making good progress. It is investing heavily in developing new products and they could more than adequately offset any decline in demand for cigarettes. As well as the growth potential of new products, the company has an established position in e-cigarettes and also has a number of strong brands within the tobacco segment. They could equate to pricing power, which could boost its financial performance.
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Fundamentals
Following its share price fall in 2017, the stock now trades on a price-to-earnings (P/E) ratio of just 11.8. This is relatively low compared to other global consumer stocks. Similarly, a 5.9% dividend yield from a shareholder payout that is covered 1.4 times by profit suggests that its income appeal remains exceptionally high. Of course, defensive stocks such as this may remain unpopular among investors in the short run. But in the long run they could generate high total returns.
Growth potential
Also offering a strong investment outlook are housebuilders such as Inland Homes (LSE: INL). The company released an update on Tuesday which showed that it is delivering on its strategy. Specifically, it has engaged in acquisitions and disposals within its land portfolio. It has also delivered a growing order book for its housing association business unit, while its overall housebuilding level is at a record high.
Looking ahead, the company appears to be confident in its outlook. Certainly, the UK’s economic prospects remain highly uncertain. But a combination of a lack of supply of new homes versus demand, and the continuation of the Help to Buy scheme, look set to keep house prices moving higher. This could mean that Inland Homes and its sector peers enjoy a significant tailwind over the coming years.
With a P/E ratio of just under 10, the stock appears to be dirt cheap at the present time. It may only have a dividend yield of 2.9%, but with shareholder payouts being covered 3.6 times by profit, it could become a strong income play in the long term.
