FTSE 100 stocks typically have very strong credentials. Many of the companies underlying these stocks have been around for a long time, are financially stable, and have given good returns to investors over time as well. But the past does not always indicate what will happen in the future. Especially now, when a number of industries are undergoing structural changes.
Tobacco’s challenge
One of these is the tobacco industry. The proportion of people smoking globally has been on the decline since 1990, according to Lancet research. The developed world in particular, has caught on to the high health risks of smoking. At the same time, tobacco alternatives have not really hit it big yet. This is creating a challenge for tobacco biggies like Imperial Brands (LSE: IMB), which need new avenues for growth.
Why I’d buy the Imperial Brands stock
Yet, I would buy this stock today. In fact, I already bought it last year and so far it has not been a bad FTSE 100 stock to hold at all. And I reckon that over the next few years, it might just yield positive returns for investors like me in more ways than one. Here is why.
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First, consider its dividend yield. At 8.3%, it has one of the highest dividend yields across FTSE 100 stocks. Moreover, some of the biggest dividend yield stocks from the index today are miners, that have enjoyed an unexpected improvement in financials because of public spending that drove up demand for industrial metals during the pandemic. I am not sure if they would have been able to boast the same kind of yields if this had not happened. Imperial Brands on the other hand, has had a high dividend yield with no outside help. Its average yield even over the past five years is a strong 7.9%.
Good dividend cover for the FTSE 100 stock
Next, I also like the dividend cover. For the full year ending 30 September 2021, its dividend cover is a strong 2.2 times according to my calculations. This is pretty impressive, considering that a cover of 2 times is considered desirable. This looks particularly good because it includes the impact of a one-off revenue bump-up from the sale of its Premium Cigar Division.
However, even if I consider underlying earnings for the year instead, which does not include this one-off impact, the cover still stands at around 1.8 times. This is not too bad either, in my view. Essentially this means that the company could well sustain its dividends in the foreseeable future. In fact, considering that it expects to improve its earnings next year only reinforces this view.
What I’d do
The Imperial Brands share price has still not gone back up to pre-pandemic levels, even though it has sustained its earnings. This is probably partly because of the question mark on its long-term sustainability discussed earlier. That said, its share price has been on the rise recently and I think that with a low price-to-earnings (P/E) ratio of under 6 times, it could well rise in the foreseeable future as well. In other words, its long-term future is still debatable, but I see potential in the stock for the next few years. That is why I have bought it. And might even buy more of it now.
