These FTSE 100 companies trade on rock-bottom price-to-earnings (P/E) ratios and boast index-smashing dividend yields. But which of them is the better bargain stock to buy next year?
Imperial Brands
At £18 a share, tobacco titan Imperial Brands (LSE:IMB) trades on a forward P/E ratio of 8.4 times for this financial year (to September 2024). It also carries a mighty 6.1% dividend yield.
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The dangers to Big Tobacco companies like this are widely documented. Consumers are rapidly turning their backs on traditional tobacco products as regulators accelerate bans on both sale and usage. My job is to decide whether these businesses’ low valuations fairly reflect this threat to long-term earnings.
FTSE 100 rival British American Tobacco underlined the scale of the pressure on Wednesday when it cut revenues and profits forecasts for next year. The Pall Mall manufacturer also wrote down the value of its US brands by a colossal £25bn.
Tobacco companies have invested heavily in non-combustible technologies to address this decline and drive future growth. Imperial Brands owns products like the blu e-cigarette and is enjoying solid success with them. Sales of its so-called Next Generation Products (NGPs) leapt 26.4% during the last financial year.
However, the decline across Imperial Brands’ traditional operations still puts me off buying this beaten-down company. Cigarette, cigar and rolling tobacco volumes plummeted 7.1% year on year during fiscal 2023. Worryingly, these categories make up more than 90% of group turnover.
On top of this, the long-term profits potential of its NGPs are under increasing danger from legislative tightening across the globe. Only on Tuesday, France’s parliament voted to ban single-use e-cigs from next September.
Imperial Brands’ share price has dropped 22% during the past five years. I fully expect this long-term downtrend to continue.
HSBC Holdings
For this reason I plan to invest my hard-earned cash elsewhere. Banking giant HSBC Holdings (LSE:HSBA) is one beaten-down Footsie stock I’d rather buy today.
Unlike with cigarettes, demand for financial products isn’t going the way of the dodo. In fact, in HSBC’s core Asian marketplace, sales of banking products are predicted to take off as wealth and population levels increase.
Research suggests that Asia’s commercial banking sector will grow at an annualised rate of 18.1% during the decade to 2031. This could provide the bedrock for long-term earnings and dividend growth at the FTSE 100 firm.
Encouragingly, HSBC is pivoting investment towards these high-growth regions to capitalise on this opportunity. It has already earmarked $6bn of investment in China, Hong Kong and Singapore to 2025 in a bid to achieve double-digit profit growth. The expected sale of its French and Canadian businesses early next year will give it even more financial firepower to grow its Asia business.
Trading could be lumpy in the near term as China’s economy splutters. But over the longer term, I expect HSBC will deliver exceptional earnings growth and with it fantastic shareholder returns.
