The share price of Imperial Brands(LSE: IMB) has fallen by over 15% since the start of the year. Investors seem to be uncertain about its long-term growth potential, with cigarette volumes continuing to fall across the globe.
However, with a low valuation and a high yield, it could now offer sound recovery prospects. It could therefore be worth buying for the long term alongside another unpopular FTSE 350 stock which issued a quarterly update on Friday.
The company in question is gold miner Centamin(LSE: CEY). Its share price declined by around 9% following its third quarter report, with its production being down by a quarter on the same period from the prior year. Certainly, there was an improvement in its operational performance versus the second quarter of the year, and production increased by 27% to 117,720 ounces versus the previous quarter. But with the company now expected to record production of 480,000 ounces for the full year, it is behind its guidance from earlier in the financial year.
Clearly, the near-term prospects for the business are somewhat uncertain. The gold price has been under pressure in recent months, with a rising US interest rate, a stronger dollar and a buoyant global economic outlook contributing to a lack of investor interest in the precious metal.
So it could be a good time to buy Centamin. The company has a forward dividend yield of over 7%, and trades on a price-to-earnings growth (PEG) ratio of just 0.6. While potentially risky, in the long run it could offer impressive total returns versus the FTSE 100.
While there is scope for the Imperial Brands share price to continue to underperform the FTSE 100 in the near term, the company appears to have improving growth prospects. Its investment in next generation products such as e-cigarettes could lead to strong growth over the long run. Consumers are gradually switching from tobacco to less harmful alternatives and this trend could continue. With the potential for improving margins in reduced-risk products, the prospects for the sector may be brighter than the stock market is currently anticipating.
In terms of its valuation, Imperial Brands appears to offer a wide margin of safety. Following its share price fall it now has a price-to-earnings (P/E) ratio of 11, with a dividend yield of over 7%. Since its shareholder payout is covered around 1.4 times by profit, it seems to be highly affordable given its current outlook.
Of course, the company may also offer defensive appeal due to the resilient nature of its business model. With the current bull market having lasted for almost a decade, a bear market may not be too far away. Therefore, the potential for FTSE 100 outperformance seems to be high over the coming years. And in the meantime, a high income return should adequately compensate investors for the risk facing the business.
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Peter Stephens owns shares of Centamin and Imperial Brands. 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.