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Imperial Tobacco Group PLC’s Dividend Prospects For 2014 And Beyond

Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.

In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.

Today, it’s the turn of Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US).

Dividends past

The table below shows Imperial Tobacco’s five-year earnings and dividend record.

  2008/9 2009/10 2010/11 2011/12 2012/13
Adjusted EPS 161.8p 178.8p 188.0p 201.0p 210.7p
Dividend per share 73.0p 84.3p 95.1p 105.6p 116.4p
Dividend growth 15.7% 15.5% 12.8% 11.0% 10.2%

As you can see, Imperial Tobacco has delivered overall excellent dividend growth across the last five years. The average annual increase works out at a very impressive 13% — way ahead of inflation.

However, as you’ve also probably spotted, the rate of dividend growth has decelerated year on year. Nevertheless, the 10.2% rise for 2012/13 is still far better than most companies have been able to deliver.

Imperial Tobacco paid a total of 474.4p a share in dividends over the five years, covered twice by ‘adjusted’ (underlying) EPS of 940.3p. For the most recent year, dividend cover was a little lower — but still healthy — at 1.8.

An excellent dividend performance, although the company has been increasing dividends somewhat faster than earnings.

Dividends present

Imperial Tobacco has an unusual 30 September financial year-end. As such, the 2012/13 results are in, but the 2013/14 year isn’t yet underway as far as dividends are concerned.

At a share price of 2,267, Imperial Tobacco’s 2012/13 dividend of 116.4p represents a yield of 5.1%.

Dividends yet to come

Analysts are forecasting Imperial Tobacco’s dividend to rise by 9.5% to 127.5p for 2014/15. However, the company itself has said: “Our intention is to grow dividends ahead of adjusted earnings and by at least 10% per year over the medium term”. That would suggest a dividend of at least 128p.

Either way, analyst EPS forecasts of 216p (up 2.5% on 2012/13) would see dividend cover fall to around 1.7. Note, though, that this is the result of the company’s express intention to grow dividends ahead of earnings.

Imperial Tobacco’s target of at least 10% annual dividend growth could be achieved in the near term with no earnings growth at all, but by simply reducing dividend cover to the 1.5 level maintained by rival British American Tobacco.

Imperial Tobacco already offers a higher yield than British American Tobacco, so there would appear to be no compelling reason for Imperial Tobacco’s management to offer a carrot of double-digit dividend growth into the bargain — and not just for the immediate future, but “over the medium term” — other than supreme confidence in the company’s ability to deliver the earnings increases to support it.

On the face of it, a dividend yield of 5.1% with the prospect of at least 10% growth a year over the medium term is one of the best income deals in the market.

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G A Chester does not own any shares mentioned in this article.