One FTSE 100 dividend stock I'd buy alongside Imperial Brands plc

Cigarette and tobacco supplier Imperial Brands(LSE: IMB) has long been recognised for its defensive qualities. But the shine came off the stock and today's share price, near 3067p, is down around 25% over the past year.

In September, the firm told us that it hit full-year expectations for earnings and City analysts reckon that means an increase of around 9% for the trading year to the end of September, and a further uplift of 3% for the current year. Meanwhile, the company is making market-share gains and reckons sales volumes are outperforming the industry.

Negative sentiment

It's possible that negative sentiment weighs on the stock because of worries about increased regulation. An announcement from the US Food and Drug Administration (FDA) didn't help when it said earlier this year that it wants to lower the nicotine levels it will allow in cigarettes. However, I think Imperial may also have been caught up in what looks like a general investor rotation out of expensive-looking defensive stocks and into cyclicals that looked like better value.

That's certainly a trade well-known fund manager Neil Woodford has been pursuing, but he held tight to fallen Imperial Brands all the way down. For what it's worth, most City analysts offering an opinion now rate the firm as a strong buy, and I reckon the valuation does look tempting.

As I write, the forward price-to-earnings (P/E) rating sits just under 11 for 2018 and the forward dividend yield at 6.1%. Forward earnings should cover the payment 1.5 times. That's a low valuation for a fast-moving consumer goods business. But as a word of caution, I'd note that the share price still seems locked in a downtrend. I've got my eye on Imperial Brands and will aim to pounce as soon as evidence materialises that the share price decline has finished.

Trading well and growing

Another FTSE 100 firm with defensive qualities updated the market today about trading during the third quarter and first nine months of the year. Smurfit Kappa Group(LSE: SKG) produces paper-based packaging and also operates recycling and forestry businesses, suggesting an end-to-end approach that embraces the packaging life cycle.

Product packaging strikes me as a market that's unlikely to go out of fashion in today's world of rampant consumerism. Indeed, the figures demonstrate steady progress with revenue up 4% for both the third quarter and the year to date. The firm was able to push selling prices up during the period to counter rising input costs and to nudge its profit margins higher, which delivered free cash flow of EUR152m during the third quarter. Other highlights include acquisitions in Russia and Greece as the company looks to expand its packaging footprint.

Imperial Brands may have a bigger dividend yield but Smurfit's dividend is better covered by earnings. At today's 2,297p share price the forward P/E rating for 2018 runs a little over 11, and the forward dividend yield is just higher than 3.4%, with the payment covered more than two-and-a-half times by forward earnings.

?An unfolding opportunity

I think there's an opportunity unfolding in defensive companies that are seeing their valuations compressed over the past year or so. As well as these two, I urge you to run your analysis over five firms that the outperforming Motley Fool analysts have focused on in a special report.

You can unlock this research free of charge, right now, by clicking on the link that follows.

Of course, there's no obligation for you to buy these shares, but after reading the report you might just do so. Click here.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

///>