During the past six months, many FTSE 100 stocks have cut or suspended their payouts to investors.
This has left investors searching for income. However, there’s at least one blue-chip dividend champion that didn’t eliminate its dividend.
Today I’m going to explain why I think it could be a good time for long-term investors to snap up a share of this stock while it trades at a low level.
FTSE 100 income champion
Imperial Brands (LSE: IMB) is one of the index’s top income stocks.
Ethical considerations aside, this FTSE 100 company has highly attractive qualities as an income investment. It has large profit margins, and a high level of free cash flow, which management can you use to support the dividend or pay down debt.
Unfortunately, in May the company announced that it would be cutting its dividend for the first time since its listing 24 years ago. Management reduced the interim distribution by 30%. It seems likely they will maintain this reduction for the full-year payout later in the year.
Still, even after this dividend reduction, Imperial will continue to offer one of the most attractive dividend yields in the FTSE 100. At current levels, the stocks supports a dividend yield of 11%.
That’s three times higher than the index average around 3.6%.
Usually, when a company’s dividend yield hits double-digits, it’s a strong sign that the market has no confidence in the payout.
However, on this occasion, I’m confident Imperial can meet these promises. The FTSE 100 company is highly cash generative and didn’t really need to cut its dividend in the first place.
Management decided to reduce the payout as a preemptive measure to accelerate debt repayment. This suggests to me that when the coronavirus crisis is over, the company may lift the dividend back to historic levels.
Undervalued equity
As well as Imperial’s highly attractive dividend credentials, the stock also looks dirt cheap.
Shares in the tobacco giant are changing hands at a forward price-to-earnings (P/E) multiple of just six. According to my research, this makes the company one of the cheapest stocks on the London market. It also suggests shares in the firm offer a margin of safety at current levels.
As such, I think that now could be a great time to buy a share of this FTSE 100 income champion. While the company might face further challenges in the near term, the margin of safety on the stock provides an excellent cushion for investors if anything should go wrong.
At the same time, that double-digit dividend yield offers a level of income investors may struggle to find anywhere else.
When owned as part of a diversified portfolio of stocks, these figures suggest to me that Imperial has the potential to yield high total returns for investors in the years ahead.
