The FTSE 100’s Best Dividend Picks: Imperial Tobacco Group PLC

Royston Wild explains why Imperial Tobacco Group PLC (LON: IMT) is a great stock for income seekers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am detailing why I believe Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) is a terrific dividend pick.

Smoking yields on the table

Imperial Tobacco, like the rest of the world’s major tobacco plays, has been a firm favourite with voracious income hunters for many, many years. The dependable nature of cigarette demand, and consequently solid earnings growth, has enabled it to consistently grow the annualbritish american tobacco / imperial tobacco payout for many years now — indeed, the business has raised the dividend at a compound annual growth rate above 12% since 2009.

However, many have questioned whether the tobacco sector will be able to continue shelling out generous payments in the coming years, as rising health concerns, pressure on consumer spending power, and rising anti-smoking legislation are becoming increasingly detrimental for product consumption.

Despite these fears, however, City brokers expect Imperial Tobacco to maintain its ultra-progressive dividend policy in the medium term at least. Current forecasts point to a 10% payout rise for the year concluding September 2014, to 128.2p per share, with an additional 9% increase chalked in for next year to 140.2p.

Such projections create enormous yields of 4.8% and 5.2% for 2014 and 2015 respectively, smashing a forward average of 3.2% for the FTSE 100.

Investing for the future

Imperial Tobacco has seen earnings gradually decline during the past five years owing to declining cigarette demand, and the company is expected to post its first annual earnings drop for many moons in 2014, with a 4% decline pencilled in.

Still, the effect of significant cost-cutting, and greater investment in its ‘Growth Brands’ like John Player Special and West, is expected to get earnings moving back in the right direction, however — expansion to the tune of 7% is expected in fiscal 2015.

These figures leave the company with dividend coverage of 1.6 times forward earnings through to the end of next year, below the security benchmark of 2 times but which hardly makes for catastrophic reading.

Meanwhile, Imperial Tobacco’s foray into the explosive e-cigarette market should also underpin solid earnings and income growth, a position which the firm bolstered through the purchase of the blu vapour brand from Reynolds American this month. The label currently commands 45% of the huge US e-cig market.

With Imperial Tobacco also boosting its exposure to the highly lucrative North America marketplace through the purchase of traditional tobacco brands including as Winston and Kool, I believe that the firm should continue doling out considerable income flows well into the future.

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.

Royston Wild owns shares in Imperial Tobacco. The Motley Fool has no position in any of the shares mentioned.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »