When I think of cigarette and tobacco producer Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Consumable products
Just like companies that make a living selling soap powder, washing-up liquid and deodorant, Imperial Tobacco sells consumable products: people buy them, use them up, then buy them again, over and over. However, you rarely see people rushing out to Tesco before showering or breakfasting in the morning because they’ve run out of Cillit Bang. It’s a different story when they’ve run out of John Player Special, though.
Because tobacco-product consumption is addictive, the repeat-purchase business model is even more engrained with tobacco firms like Imperial Tobacco than it is with companies like Unilever and Reckitt Benckiser. Consumer behaviour within the industry provides a tail wind that Imperial rides by targeting specific brands to different regions in the world.
2) Cash flow
Consumable products generate reliable cash flow. The trick is for Imperial Tobacco to use that cash wisely, and the firm has done a good job of returning a lot of it to share holders through the dividend. There is a long history of rising dividend payments.
However, in the wider tobacco industry, volumes are falling and Imperial is keeping the cash flowing by attacking costs and optimising profitability by raising sale prices. Although cash flow seems flat, the firm is driving up earnings- and dividend-per-share figures by buying back its own shares.
What now?
So, for the time being, the dividend payment seems secure as Imperial Tobacco finds ways to optimise the use of its cash flow.
