Imperial Brands plc isn't the only dirt-cheap dividend king I'd buy

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British American Tobacco cigarette making equipment

After dropping nearly 20% in price over the past year, shares of Imperial Brands (LSE: IMB) are beginning to look intriguingly cheap to me at less than 12 times forward earnings while offering a 5.1% yield.

While many investors are rightly worried about the long-term negative effects of continued regulatory clampdowns on tobacco products, Imperial's recent share price problems are almost entirely self-made as larger competitor British American Tobacco's share price is up over 8% during the same period.

Imperial's issues stem largely from lack of scale in a rapidly consolidating industry, an unwieldy portfolio of brands and geographic weighting skewed toward developed markets most at risk from further regulatory pressure.

However, the company is still well-positioned to solve these problems and turn things around. Management is already taking action to slim down the number of brands it offers with a 33% reduction in the number of stock keeping units it sells since 2013 and a target of 50% in mind. This rationalisation of the portfolio is key as it allows for more investments in a smaller number of effective, growing brands and improves margins and sales.

The positive effects of this plan are already taking shape and in H1 we saw total volumes of these growth brands rising 3.2% as they increased their market share from 7.4% to 8% globally year-on-year (y/y) even as total group volumes fell 5.7%. An increased focus on growth markets such as China, Vietnam and Turkey is also paying off as revenue from these countries rose 1.7% y/y.

As long as Imperial focuses its investments on a smaller number of more profitable and faster growing brands and re-orients its geographic focus towards growth markets, I believe it can right the recent decline in its share price. And if not, it's more and more likely that a larger competitor will come in with a bid.

A more reliable option? 

But if investing in tobacco stocks isn't your cup of tea, another high-yield stock I've got my eye on is global car dealer and distributor Inchcape (LSE: INCH). Results released this morning covering the quarter to September saw the company's revenue rise 11.3% on a constant currency basis to £2.3bn due to an acquisition in South America. It saw organic growth of 9.8% in its distribution business and 3.6% in its retail division.

As we can see, Inchcape is still growing nicely even as the UK car market appears to be running out of steam. This is because Britain represents a small portion of its sales, with Asia accounting for 33% of profits in H1 and emerging markets 19%,while the UK & Europe represent only a quarter of group profits.

Investors should also bear in mind that car sales make up only a portion of overall profits with the distribution side of the business by far the biggest driver, and more reliable after-sales accounting for a large chunk of retail profits. With plenty of room to expand its full-service distribution and retail offering into many markets across the globe and a healthy 3% dividend yield, Inchcape is looking very attractive to me with its current valuation of only 12.2 times forward earnings.

If Inchcape is still too pricey for you though, I recommend reading the Motley Fool's free report on one Top Small Cap trading at just eight times earnings. And don't let this low valuation fool you into thinking this is a low growth stock because it has increased earnings by double-digits four years in a row.

To discover this dirt-cheap stock that's more than doubled earnings in just four years for yourself, simply follow this link for your free, no obligation copy of the report.

Ian Pierce 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.


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