The crashing FTSE 100 stalwart I’m adding to my ISA before 5 April

Rachael FitzGerald-Finch discusses why she’s adding FTSE 100 firm Imperial Brands to her ISA before the 5 April deadline.

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The crashing FTSE 100 has collided with the end of another tax year. The index has recently seen its biggest quarterly fall in over three decades. But despite the value-destroying nosedive, the timing of it could be an opportunity for ISA investors. 

The deadline for savers to make the most of their tax-free ISA is midnight on 5 April 2020. Any allowance not used by then will be lost. With interest rates now near zero, I think it makes sense to use your ISA allowance if you can by adding to it.

The ultimate FTSE 100 defensive stock 

The crashed FTSE 100 share opportunity I’m adding to my ISA is Imperial Brands (LSE: IMB). Fast-moving consumer goods companies have been relative safe havens through the Covid-19 pandemic. Not surprisingly, Imperial’s sales have held up. This is mainly due to the continuing demand for its main product, tobacco. Understandably, this is a company that will not be every investor’s cup of tea.

However, look past this controversial product and you’ll see a very successful FTSE 100 business. Although global tobacco sales have been dropping over time, Imperial’s customer base has been willing to pay higher prices for its products. This allows the company to protect its profit margins and grow its dividends. Provided Imperial can continue offsetting dropping sales with price increases, margins will likely continue. In the short to medium term, I think this is plausible. But it is a factor to watch for in the long-term.

Like many FTSE 100 businesses, Imperial’s supply chain has experienced some recent disruption. The company has managed this well by stockpiling its products where required. It is also diversifying into next generation products (read: vaping). In addition, the appointment of a new CEO has reduced some uncertainty about the firm’s future.  

A top FTSE 100 dividend-paying stock 

One of the main highlights of holding shares in Imperial is its high dividend yield. The yield has averaged about 12.6% over the last 12 months. Going forward, the yield is perhaps too high at about 17.5%. However, some of this is likely due to current unstable market conditions.

This means investors are able to reinvest at good rates. I think compounding investments right now is one of the best ways to improve your future income. 

A cash-generative business

Another big attraction for me is Imperial’s ability to convert 95% of its operating profits into cash. Cash may be used for investments or for rewarding shareholders. Imperial has indicated the latter by committing to a ‘progressive’ dividend. It is also still planning to return cash to shareholders in the future via buybacks. 

Imperial is currently trading around 1,557p, having crashed with the rest of the FTSE 100. This is down from 1,900p at the beginning of 2020. It’s also hugely below some analyst valuation estimates of £35.00.

These analysts have used Imperial’s “wide economic moat” in their analysis. In other words, competitor firms are going to have a hard time chasing market share. Imperial is dominant in its sector.  

At about 3 times net debt to profit, Imperial holds more debt than I think is ideal. However, its earnings are reliable, meaning this is sustainable.

Overall, Imperial is a solid business that rewards its shareholders well. It’s definitely one for my ISA right now.   

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rachael FitzGerald-Finch has no position in any of the shares mentioned. 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.

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