The 2024 results from the FTSE 100’s Imperial Brands (LSE: IMB) released on 19 November looked positive to me.
The tobacco and nicotine products firm saw reported operating profit rise 4.5% year on year to £3.55bn. Earnings per share jumped 19.1% to 300.7p.
These numbers were powered partly by market share gains in four of its five priority tobacco product markets. Accounting for the rest was a 26.4% increase in revenue from its next-generation products (combustible tobacco replacements).
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In turn, these drove reported free cash flow 3% higher to £2.34bn, allowing for a 4.5% increase in the dividend to 153.42p. Additionally positive for shareholders is the launch of a £1.25bn share buyback, which would tend to support share price gains.
A risk here is any delay in the company’s ongoing switch from combustible tobacco products to non-combustible replacements. This might allow its competitors using the same strategy to gain market share from it.
However, for 2025, the firm expects single-digit net revenue growth and mid-single-digit adjusted operating profit growth.
Where does this leave the share valuation?
To work out whether the stock is undervalued, I started by looking at the key price-to-earnings (P/E) measure. This shows Imperial Brands at just 8.1 against an average 15.2 P/E for its competitor group. So it may be a serious bargain on this basis.
The same is true of its 1.1 price-to-sales ratio compared to a 3.8 average for its peers.
To nail down what this means for its share price, I ran a discounted cash flow (DCF) analysis. Using other analysts’ figures and my own, this shows Imperial Brands shares are 65% undervalued at their current £25.23 price. Therefore, a fair value for them is £72.09.
They may go never reach that point, of course. However, these key ratios and the DCF analysis, underline to me how much of a bargain the stock now looks.
The big dividend bonus for shareholders
This year’s 153.42p a share dividend yields 6.1% on the present share price. It compares very favourably to the current average FTSE 100 yield of 3.6% and to the FTSE 250’s 3.3%.
So, £10,000 of Imperial Brands shares would generate £610 of dividend payments in the first year. Over 10 years on the same average yield, this would rise to £6,100 and over 30 years to £18,300.
This is clearly a much better return than can be made in a standard UK savings account right now. However, the payouts could be turbocharged by using a common investment process known as ‘dividend compounding’. This involves using the dividends paid to buy more of the stock that paid them.
Doing this with £10,000 on the same average 6.1% yield would generate £8,376 in dividends after 10 years, not £6,100. And after 30 years of this, £52,051 in such returns would have been made rather than £18,300.
The total value of the holding by then would be £62,051, generating £3,785 a year in dividend income.
Will I buy more of the stock?
I have built my Imperial Brands shareholding over some time for its strong dividend income and share price growth prospects.
I think these are qualities still strongly in place in my view, so I will be buying more of the shares very soon.
