Questor share tip: Imperial Tobaccco is cash generating machine
A general sense of slight disappointment pervaded this week's trading update from Imperial Tobacco – but again, things aren't as bad as some fear.
A general sense of slight disappointment pervaded this week's trading update from Imperial Tobacco – but again, things aren't as bad as some fear.
7:00AM GMT 03 Feb 2012
CommentImperial Tobacco
£23.08 +5p
Questor says BUY
£23.08 +5p
Questor says BUY
Obviously, investing in tobacco shares is not to everyone's taste – but through good times and bad they continue to make money for shareholders.
A study this week released by BNY Mellon Wealth Management and Janney Montgomery Scott showed that the MSCI World Tobacco Index had the highest return out of 67 groupings in the MSCI World Index in the 10 years to 2011. The sector was the best place to put your money in the equity markets for the past 10 years.
Imperial said that it expected to meet full-year consensus expectations. However, volumes were hit by sanctions on Syria and a price war in Spain – a significant market for Imperial.
This meant the group's overall cigarette volumes fell by 7pc and net tobacco revenue slid 1pc.
However, Imperial is focusing on key emerging markets – and the pricing environment is positive.
"Combined stick equivalent volumes of our key strategic brands were up 3pc and net revenues up 10pc with our focus on driving growth in these brands in emerging markets and fine-cut tobacco in the EU," said Alison Cooper, Imperial chief executive.
Key global strategic brands include Davidoff, Gauloises Blondes, JPS and West. Luxury Cuban cigars were also a bright spot, with volumes rising 14pc.
The outlook for the rest of the year is positive. Volume declines should ease throughout the year and comparisons get easier.
Imperial's £500m share buyback is well on track, with £320m shares purchased between May and December. The company also confirmed its commitment to grow the dividend ahead of earnings per share.
By historical standards the shares are looking cheap, trading on a September 2011 earnings multiple of 11.2, falling to 10.3 next year. The prospective yield is 4.6pc, rising to 5.1pc, which is attractive for income-seekers.
Imperial has changed its dividend policy to increase the payout ratio to 50pc of adjusted earnings, instead of 47pc.
The shares were last recommended as a buy at £21.03 a share on September 22 last year. They are up 10pc since then, compared with a market up 15pc.
The sector should continue to generate significant amounts of cash to pay dividends and invest in its key brands.
The shares remain a buy for income-seekers.
