Can Imperial Tobacco Group's (LSE: IMT) dividend continue to beat the wider market?
In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.
Just look at the iShares FTSE 100 ETF (LSE: ISF), for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:
|Dividend per share||19.1p||20.2p||17.1p||16.2p||18.1p|
But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US).
The big question is: can the company's dividend continue to out-perform its index? Let's take a closer look.
Imperial Tobacco Group is the fourth largest tobacco company in the world. With the shares at 2432p, the market cap is £23,975 million. This table summarises the firm's recent financial record:
|Year to September||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||1,700||3,569||2,859||2,556||2,119|
|Adjusted earnings per share||136.9p||161.8p||178.8p||188p||201p|
|Dividend per share||63.1p||73p||84.3p||95.1p||105.6p|
So, the dividend has increased by 67% during the last five years -- equivalent to a 13.7% compound annual growth rate.
Imperial Tobacco has stormed ahead since breaking from conglomerate Hanson in the late 1990s. Brands include Embassy, Regal, John Player Specials, Lambert & Butler and Castella cigars. Right now, the directors see significant growth opportunities in the firm's Rest of the World region across Eastern Europe, Africa and the Middle East and Asia-Pacific. Around 33% of revenue comes from that region with the Rest of Europe region delivering 23%, the UK, 13%, Germany, 13%, the Americas and Spain, 7%. Overall, Imperial is active in around 160 countries.
The addictive nature of the firm's product keeps the cash flowing and that makes me optimistic on the prospects for the dividend.
Imperial Tobacco's dividend growth score
I analyse four different features of a company to judge whether its dividend can continue to rise:
1. Dividend cover: adjusted earnings covered last year's dividend almost twice. 3/5
2. Net cash or debt: net gearing around 150% with borrowings over eight times earnings. 1/5
3. Cash flow: good support for profits from cash flow: 4/5
4. Outlook and recent trading: good recent trading and a positive outlook. 5/5
Overall, I score Imperial 13 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.
While debt seems high, the company has very strong cash flow, which makes interest payments easier to manage. Both recent trading and the outlook are encouraging.
Right now, the forecast full-year dividend is around 116p per share, which supports a possible income of about 4.8%. That looks quite attractive, to me.
Imperial Tobacco Group is one of several dividend out-performers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: 8 Income Plays Held By Britain's Super Investor. This free report analyses the £20 billion portfolio of legendary high-yield expert Neil Woodford. Click here to discover his favourite dividend opportunities with good growth potential.
> Kevin does not own any shares mentioned in this article.