The Imperial Brands (LSE: IMB) share price has gained 14% over the past 12 months, in one of the FTSE 100‘s most resilient performances. It saw a big leap in May when the tobacco firm released first-half results.
Imperial is also one of the most reliable dividend stocks in the top London tier, yielding nearly 9% last year. I think it’s still among the best FTSE 100 shares to buy now, even after this year’s gains. Let me explain why.
Changing trends
Firstly, the downside. Despite a big 2022 rise, Imperial Brand shares are still down 48% over five years. It’s the old tobacco thing. It’s going out of fashion and governments around the world are trying to stamp out usage.
There definitely is a big risk that the recent resurgence might not last, especially if we see legal restrictions on the development of new tobacco products.
Still, that hasn’t happened yet, and the vaping trend does seem to be gathering strength. At the halfway stage, Imperial updated us on what it calls its next-generation products (NGP). And it’s really just in the start phase.
Chief executive Stefan Bomhard said: “Our focus for the remainder of 2022 will be to invest further in our five priority markets and begin the rollout of our NGP strategy.” And that certainly seems to have boosted investor expectations.
Recession-resistant?
Imperial Brands strikes me as a stock that’s likely to hold up well in a recession. The question of whether we’ll see a recession is still open, especially after the UK posted growth in May. It was only 0.5%, but it beat expectations.
When people are worrying about their financial situation, are they likely to drop an addictive nerve-settling habit? Some will as they try to save money, but many won’t. In fact, in 2020 when the world was hit by pandemic worries, total cigarette sales increased for the first time in 20 years.
A number of analysts agree on the recession-resistant thing. And there’s a fairly strong ‘Buy’ consensus among brokers now, even after recent gains. I’m very cautious about brokers’ recommendations, but they offer an extra bit of input we can use to help shape our own opinions.
Top dividend
Imperial Brands frequently shows up in lists of top FTSE 100 dividend stocks. Forecasts suggest steady yields at around the 8% mark over the next three years. That’s a bit below the 2021 yield, but the dip looks to be mostly down to the rising share price.
I think we could have sustained dividends, if not hugely growing ones. But 8% per year should compound very nicely.
Cover by earnings has traditionally been strong, at around 1.8 times in 2021. It’s a strongly cash-generative business, reporting a 12-month cash conversion rate of 102%.
There’s a risk we might see short-term pressure on dividends as the company moves more towards new kinds of products. But we’re looking at a forecast price-to-earnings (P/E) ratio of only about eight. Coupled with the strong cash flow and solid dividend cover, I find the Imperial Brands share price attractive.