Imperial Brands’ (LSE: IMB) share price has suffered an extraordinary decline over the last 18 months. Back in September 2016, it was a FTSE 100 company that everyone wanted to own. The stock had risen spectacularly over a five-year period and was trading above 4,000p. However, since then, sentiment towards the £22bn market cap tobacco manufacturer has changed dramatically, with the shares today changing hands under 2,400p today.
At that price, Imperial trades on a forward-looking P/E ratio of under 9, and sports a dividend yield of around 8%. So what on earth is going on? Is the FTSE 100 stock a bargain or is the company in trouble?
Here’s fund manager Neil Woodford’s take.
The wrong price
He believes the market has got it wrong with Imperial. In a February update, Woodford Investment Management posted the following comment on its website in relation to the tobacco giant:
“Current market conditions have not been favourable for Imperial Brands, which has been a deeply unpopular stock. Nevertheless, from a fundamental perspective, Imperial Brands continues to be a business which should deliver attractive and sustainable long-term dividend growth, as it has done throughout its history as a quoted, independent business. With the share price revisiting valuation territory that we haven’t seen in many years, Imperial Brands simply looks like it is trading at the wrong price.”
Furthermore, in relation to Imperial’s February AGM statement, Woodford Investment Management commented: “Overall, the update is as expected and it suggests that the business is in far better shape than its share price and valuation would suggest.”
Clearly, Woodford and his team believe that Imperial is oversold at present. And it appears that they are not afraid to put their money where their mouths are. Imperial is currently the top holding in both Woodford’s Equity Income Fund and his Income Focus fund with weightings of 6.75% and 6.96% respectively.
So, has he got it right or could this turn out to be another disaster like Provident Financial?
Oversold
While I don’t always agree with Woodford’s calls, I believe that on this occasion he has got it right. Imperial simply looks way oversold at current levels.
There are no doubt concerns about the long-term profitability of the industry, but the fact remains that Imperial is a cash generative business capable of paying out sizeable dividends to shareholders. In its recent AGM statement, the group advised that “cash generation remains strong, underpinning our 10% growth. ”
Imperial’s dividend growth track record is outstanding, having recorded nine consecutive dividend increases of 10% now. And with a payout ratio of 64% last year, the dividend does not look at risk.
For me, a classic contrarian indicator here is last week’s downgrade from Goldman Sachs in which the investment bank cut its stance on Imperial from ‘buy’ to ‘neutral.’ I find this quite incredible. Surely, it would have been more appropriate to downgrade the stock to neutral when it was trading above 4,000p, and not after a 40% share price decline?
For long-term investors, today’s share price and dividend yield look to offer strong long-term value, in my opinion.
