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I think these could be the FTSE 100’s top 2 dividend buys right now

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I’m talking about the FTSE 100‘s two tobacco companies today, Imperial Brands (LSE: IMB) and British American Tobacco (LSE: BATS). Now, there are certainly ethical issues at play here, but it’s not my place to push my views in that respect. You have to make up your own mind on that – I’m just here to make the investment case. And in that regard, I reckon these both offer very attractive long-term dividend potential.

With the share prices of the two badly depressed in 2020, their dividend yields are soaring. The British American Tobacco share price has fallen 16% since the start of the year. But forecasts are still strong, putting the shares on forward P/E multiples of only around 8. That pushes forecast dividend yields up to the 8% mark, with the cash covered around 1.5 times by earnings.

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Even bigger fall

Over at Imperial Brands, the situation looks more extreme. The share price is down 27%, the forecast P/E is down to only a little over 5. And the predicted dividends would yield around 10%. There is a modest dip in earnings on the cards for the current year, but analysts expect things to pick up again next year. And forecast dividend cover is even better at 1.9 times.

Imperial Brands’ financial year ended on 30 September, and we’ll have to wait until 17 November for the results. But the firm gave us a trading update Thursday.

New CEO Stefan Bomhard spoke of “resilience in adapting to the challenges posed by the Covid-19 pandemic,” and of his “confidence in our ability to deliver a stronger performance in the years ahead“.

Attractive outlook

The company says the business has performed well, with consumption rising slightly. It expects a full-year rise in tobacco net revenue of 1% at constant currency, slightly ahead of interim guidance. But due to some extra manufacturing costs and provisions, down to the Covid-19 impact, earnings per share should be down around 6%. That’s in line with market expectations, and I think the dividend is very safe.

The year for British American Tobacco, meanwhile, doesn’t conclude until December. At the halfway stage, chief executive Jack Bowles described the company as “performing well in difficult circumstances“. Echoing progress away from actually burning tobacco, the firm told us that 10% of its revenues came from non-combustible products. It’s targeting 50m consumers of non-combustibles by 2030.

Adjusted revenue was up 2.4%, with adjusted profit from operations up 3.3%. The company put adjusted EPS 6.6% ahead, better than full-year forecasts.

Cash cow dividend stocks

My Motley Fool colleague Jonathan Smith has picked British American Tobacco as the one stock he’d buy in October to hold for life. He makes some excellent points, which I think apply to Imperial Brands too. Both companies are very mature, and there’s no ‘jam tomorrow’ growth element to them. No, they’re just doing what they do very well. And that’s a high margin business that’s strongly cash generative, paying top dividend yields. There’s also a big defensive moat around the tobacco business, and I really can’t see any newcomers knocking the giants off their perches.

In short, I’d say Imperial Brands and British American Tobacco have evolved into exactly the kind of cash-cow businesses that every company dreams of becoming.

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Alan Oscroft 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.