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Is the Imperial Brands share price a value trap?

Could Imperial Brands’ (LON: IMB) low valuation suggest it is worth avoiding?

Over the past five years, the Imperial Brands (LON: IMB) share price has declined by over 50%. There are a number of possible reasons for this. Namely, a reduction in global cigarette volumes amid a consumer pivot to less harmful alternatives, such as e-cigarettes, has prompted greater uncertainty across the industry.

Furthermore, Imperial Brands has arguably lagged some of its rivals in adapting its business model to reduced-risk products. While rivals such as British American Tobacco are ramping up revenues from next-generation products such as heated tobacco, Imperial Brands continues to focus on building the foundations for such a business.

Meanwhile, investor sentiment towards tobacco companies has arguably worsened since the start of the pandemic. An increasing focus on ESG (environmental, social and governance) investing means that tobacco stocks may fail to be included in a larger number of portfolios than was the case a decade ago.

As a result of its share price slump, Imperial Brands now has a dividend yield of almost 9%. This could indicate that its shares offer good value for money, alongside their income appeal. Indeed, the company’s recent results highlighted that it is making progress in implementing a revised strategy.

For example, it has restructured parts of its operations to improve efficiency as part of a two-year plan to strengthen the business. It is also conducting pilots in next-generation products as it seeks to pivot towards areas that offer greater sustainability than tobacco. This two-year plan will be followed by a three-year focus on improving returns that could act as a catalyst on its share price.

In addition, the uncertain outlook for the world economy in the short term could prompt investors to focus increasingly on defensive shares that provide a greater amount of certainty. With relatively stable revenues, and the potential to raise prices in response to higher inflation, Imperial Brands’ investment appeal could increase as market conditions change. And, with interest rate rises now seemingly less likely than they were even a few weeks ago, companies with high and relatively resilient dividend yields could become increasingly popular.

Therefore, while Imperial Brands’ share price has disappointed in recent years, its income potential, the prospect of improved returns as its strategy is rolled out, and changing stock market conditions could make it a relatively appealing stock. This may mean it can deliver a marked improvement in total returns in future versus the recent past.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.