Few FTSE income shares look as ripe with possibility for dividend and share price gains to me as Imperial Brands (LSE: IMB).
Its earnings remain remarkably steady for such a mature business, supported by disciplined cost control and resilient demand. That combination continues to generate the huge cash flow that underpins its generous dividend. Yet the market still seems slow to reflect the strength of these fundamentals in the share price.
So, what sort of returns am I looking at with another £20,000 investment in the stock?
What are the potential price gains?
For professional investors, discounted cash flow (DCF) analysis remains the gold standard in ascertaining where any stock ‘should’ trade. It does this by projecting future cash flows for the underlying business and translating them into today’s money.
Naturally, the less certain those forecasts are, the heavier the discount becomes. Different assumptions here can mean analysts’ DCF outcomes vary sometimes. But using my own assumptions — including a 9.1% discount rate — Imperial screens as 47% undervalued at its current price of £27.93.
That points to a fair value of £52.70, nearly twice the present price. This gap between price and value is crucial for long-term profits as the former tends to trend towards the latter over time.
So, if this historical trend continues, £20,000 invested today could be worth £37,681 at the end of the process.
What about dividend gains too?
Dividend yields can go up and down as share prices and annual payouts change, of course. Nevertheless, analysts forecast Imperial’s dividend will rise from the present 160.32p to 167p this year, 175.6p next year, and 185.2p in 2028. These would generate respective dividend yields of 6%, 6.3%, and 6.6%.
Using the projected 6.6% as an average, my £20,000 would make £18,626 in dividends after 10 years and £124,071 after 30 years. The figures also reflect dividend compounding being used to supercharge returns.
Including the initial £20,000, the holding would be worth £144,071. And this would pay a yearly income of £9,509!
What’s under the bonnet?
Powering long-term gains in any company’s share price and dividends is a sustained rise in earnings.
A risk here for Imperial is any delay in its transition from tobacco to nicotine-substitute products. This could allow its competitors doing the same to gain an advantage. Another is tougher regulatory action in key markets, which could limit pricing power and slow the growth of next‑generation products.
Nonetheless, analysts project that Imperial’s earnings will grow a very robust 7.1% a year to end-2028 at minimum.
My investment view
Imperial Brands’ undervaluation, strong cash generation and rising dividends make it a highly attractive long‑term income opportunity, in my view.
And the market seems slow to reflect the strength of its earnings outlook, leaving a huge price-to-value gap as well.
For investors seeking income stability with price gains potential, it looks a compelling prospect to consider, I think.
I will be adding to my holding in the firm very shortly indeed. And I also have my eye on other deeply undervalued, high-yield opportunities in other sectors of the FTSE right now.
Should you invest £5,000 in Imperial Brands Plc right now?
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Simon Watkins owns shares in Imperial Brands.
