I normally focus on mid and small cap companies, but on this occasion I have identified a FTSE 100 stock which I think looks attractive at current levels. Occasionally the market throws up real bargains, and when you look back you wonder how the share price ever dropped to that level. I think this is a case in point.
The share price of Imperial Brands (LON:IMB) has been weak following a little disappointment with its full-year results published on 8th November. Following that, last week we had the shock result of Donald Trump winning the US Presidential Election. US Treasury bonds started to sell off, with the market anticipating that a Trump presidency will lead to higher economic growth but also higher inflation.
As a result of the Trump victory, defensive sectors such as food, beverage, tobacco and utilities have also sold off. Many see them as bond proxies, with the thought being that if you can gain a higher yield by buying a bond than you could before, the yield you should demand from these defensive stocks should also be higher. My view is that in many cases this has been taken too far.
Back in August when Imperial Brands hit 4,130p the prospective dividend yield for the year ending 30th September 2016 was forecast at 3.7%. At today’s price of 3,445p the prospective dividend yield for the year ending September 2017 is 5.0%! It went ex its Q3 dividend of 54.1p yesterday morning.
The second argument in Imperial Brands’ favour is that it should be able to grow the dividend at 10% per annum for the next few years. It has committed to a cost cutting programme aimed at reducing annual operating costs by £300m by 2020. In its results statement, it pointed out that it had increased the dividend by 10% for the 8th consecutive year and said that it was committed to similar growth in the medium term. The problem with fixed interest bonds is that they are just that. The coupon does not grow each year.
Third, should inflation pick up, Imperial Brands should be able to push through price rises to maintain or even expand margins.
Finally, on a short-term view, the Relative Strength Index points to the stocks being as oversold as it has been at any time in the last 20 years. I would hope that within a year, the share price will have hit its previous peak, which (including the dividend) would give a total return of 25%.
If everything goes horribly wrong in equity markets this company, with its stable balance sheet and cash flow, would be one of the holdings in my portfolio that I think would cause me the least concern. I think Imperial Brands is a super stock for those looking for a decent yield and solid dividend growth prospects.
I manage my website, www.JohnsInvestmentChronicle.com in which I show my portfolio and all transactions. I blog within an hour of trading, with an explanation, and send an alert email to my subscribers. I do not pretend to have all the answers but I hope my portfolio, and the trades, provides food for thought both for experienced investors and those who are new to managing their own portfolios.
I think what I do is unique. There are plenty of tipsters out there who will remind you of the good ones and quietly forget the duffers; I do not have that luxury as the portfolio is there for all to see. I have to confront my mistakes and deal with them. A tipster also does not show how a tip fits into the context of an overall portfolio. My portfolio of up to 30 holdings has different holding sizes based on my conviction behind the stock and how it fits into the overall risk profile of the portfolio.
In September 1984, I left university with a degree in Zoology and started work in the City of London. Over the next twenty five years most of my career involved managing UK equity portfolios with Fleming Investment Management and Henderson Global Investors, for corporate and local authority defined benefit pension schemes as well as the reserve fund of a well-known charity. During 2009 I left full time employment and decided to take time out to consider the next stage of my career, whilst putting my years of experience to good use investing the family savings. I have thoroughly enjoyed the freedom of investing from home and in January 2012 I set up I set up www.JohnsInvestmentChronicle.com.