2 FTSE 100 shares I’d buy for the value rotation

After years of being unloved and unwanted, cheap FTSE 100 dividend stocks seem to be coming back into fashion. The market is calling this a “value rotation”. Today, I want to look at two lead index shares I’m considering for my portfolio in the hope that I can profit from this shift.

Old-school value: 8% dividend yield

What seems to be happening is that many high-flying tech stocks — some of which have never made a profit — are falling. At the same time, investors are showing fresh interest in old-school value stocks. These typically produce lots of spare cash, but are slow growers.

The first company I want to look at today is a classic value play, in my opinion. FTSE 100 stock Imperial Brands (LSE: IMB) is the world’s fourth largest tobacco company. Its flagship brands include JPS and Winston.

However, among investors, Imperial is known best for its high profit margins, strong cash generation and generous dividend.

Although chief executive Stefan Bomhard cut the dividend payout in 2020, Imperial Brands’ low share price means this share currently offers a dividend yield of 8%. This payout is comfortably covered by earnings, and I believe it should be sustainable.

Of course, there are some risks here. Imperial generates nearly three quarters of its profits in the USA, UK, Spain, Germany, and Australia. Smoking rates are generally in decline in Western markets. This means Imperial must fight for market share to stop its sales falling.

Further restrictions on tobacco sales are another risk, as is the growing trend among fund managers for avoiding the tobacco sector.

Even so, I reckon that Imperial shares are probably too cheap. With the share price at around 1,750p, IMB trades on just seven times forecast earnings and offers a giant 8% dividend yield. The shares are up nearly 8% so far this year and I think further gains are possible.

Activist pressure could lift this FTSE 100 share

Telecoms group Vodafone (LSE: VOD) is another stock that’s lagged the market in recent years. To be fair, I think some of this poor performance has been self-inflicted. Although I believe its boss Nick Read has done a good job of slimming down the business and releasing value, Vodafone just hasn’t been able to deliver any real growth.

One problem for Vodafone and its rivals is that the costs of building and maintaining networks is very high. At the same time, tough rules on competition mean that prices are kept low.

There’s a risk that this situation will continue, but I think things may be changing. Vodafone recently rejected an €11bn takeover offer for its Italian business, saying it was continuing to pursue “several” other consolidation opportunities in Europe.

Merging two major mobile networks should help to improve profit margins. My guess is this is one of the aims of activist investor Cevian Capital, which has been buying Vodafone shares.

Vodafone’s 5% dividend yield looks safe enough to me, as its backed by the group’s €5bn annual free cash flow. If Read can find a route back to growth, I think Vodafone’s share price could rise significantly from current levels.

Roland Head owns Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Vodafone. 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.