Imperial Tobacco (LSE: IMT)(NASDAQOTH: ITYBY.US) and British American Tobacco (LSE: BATS)(NYSE: BTI.US) have delivered excellent earnings and dividend growth in the past.
Ten years ago, Imperial Tobacco paid its shareholders 33p in dividends for the year. Last year, the payout was 105.6p per share. The shares are up 120% in that time. In the last five years at Imperial, earnings per share (EPS) has increased at an average rate of 10.7%. The dividend has risen even faster, at an average rate of 11.9%.
British American Tobacco (BAT) has been even more successful. Ten years ago, BAT paid 35.2p per share in dividends. Last year, this figure hit 134.9p a share. Five-year compound annual dividend growth at BAT is a whopping 15.3%. In those five years, earnings at the company have increased by an average of 13.2% per annum.
However, recent results suggest that the era of double-digit annual growth is over.
The number of cigarettes being sold is faltering. Sales in some regions are down more than 10%. Regulations around consumption, advertising and retail are becoming more restrictive worldwide. This is impacting the bottom line at both companies.
Revenues at Imperial Tobacco fell in 2012. This flowed through to an EPS increase of 4% for the year. Halfway into this year, operating profit was 5% down. EPS fell 3%.
As for BAT, its recent interim results confirmed a 2% increase in revenues and a 3% decline in cigarette volumes. While the dividend was up 7% and EPS rose 9%, this was the first year since 2004 that BAT failed to increase either number by 10% or more.
Worse still, profit forecasts for both companies are in a clear downtrend. This time last year, analysts were expecting Imperial’s EPS for the year to come in at 215p per share. This expectation is now 3% lower at 209p.
At BAT, a 227p per share profit forecast one year ago is 222p today.
Trading on 10.4 times consensus forecasts and with the prospect of a 5.3% dividend, Imperial is not expensive. BAT, however, trades on 15.3 times forecasts and pays a lower dividend. Given the long-term outlook, I believe that both shares should be cheaper and BAT significantly so.
You may disagree and you would be in good company. Neil Woodford, the UK’s top fund manager, is a big fan of big tobacco stocks. If you think that you could learn more from his investment decisions, get our free report “8 Shares Held By Britain’s Super Investor”. This report is totally free. To start reading straight away, just click here.
> David does not own shares in any of the above companies. He has bet that the price of British American Tobacco shares will fall.