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Top-tier FTSE heavyweight Imperial Brands (LSE: IMB) has risen 28% in the past year. However, this does not mean the shares are left without any value in them.
In fact, following its recent full-year 2025 results, I believe the company looks in very good shape. This should drive its earnings higher in the coming years, powering further share price gains.
Along with other analysts, I also think the firm’s dividends will increase significantly too. This would seriously boost its existing credentials as a great stock to generate retirement income.
So, what’s the growth story here, and what are the exact numbers we are looking at?
What’s the business narrative?
Broadly speaking, the results released on 18 November showed resilient adjusted growth, strong cash generation, and continued good shareholder returns.
Adjusted tobacco and ‘next-generation products’ (NGP, mainly nicotine substitutes) rose 4.1% year on year to £8.316bn. The NGP segment’s revenue alone grew 13.7%, driven by oral nicotine products demand in the US and Europe. This helped offset the ongoing decline in cigarette volumes.
On the back of these gains, adjusted operating profit rose 4.6% to £3.988bn and earnings per share jumped 9.1% to 315p. As a result, the dividend was raised 4.5% to 160.32p.
What’s the outlook?
The full-year numbers again underlined the importance of the firm’s ongoing strategic shift from tobacco products to NGPs. It aims to maintain NGP’s double-digit net revenue growth each year to 2030.
By that time, Imperial Brands expects its NGPs to account for at least 25% of the $17bn global market for these products.
Given this, the key risk for the firm is any derailment of this plan. This could hit its short-term earnings and longer term allow competitors to gain an advantage in the segment.
That said, the firm expects low-single-digit tobacco and double-digit NGP net revenue growth. Adjusted operating profit is expected to grow in the 3%-5% range.
It also expects to generate free cash flow of at least £2.2bn in the coming 12 months to add to the £2.7bn this year. This can be a major driver for business growth in itself.
Rising dividend yield bonus for shareholders
The latest 160.32p dividend gives a yield on the current £32.13 share price of 5%.
However, analysts forecast that the dividend will rise to 168.6p in 2026, 176.9p in 2027, and 194.1p in 2028.
These would generate respective divided yields on the present share price of 5.2%, 5.5%, and 6%.
So, investors considering a £10,000 investment at 6% would make £8,194 in dividends after 10 years. And after 30 years, it would be £50,226. These numbers include ‘dividend compounding’.
My investment view
I am going to buy more of the stock, based on the projected dividend gains and strong earnings growth prospects.
A further positive in my view is the extreme undervaluation of the stock. This could produce significant share price gains if I ever decide to sell it.
Specifically, a discounted cash flow analysis shows the stock is 61% undervalued at its current £32.21 price.
Therefore, its ‘fair value’ is £82.59.
I am also looking at other stocks that offer a similar combination of a deep discount, strong earnings growth and high dividend yield.
