Why Imperial Tobacco Group PLC Should Not Be In Your 2014 ISA

Imperial Tobacco Group PLC (LON: IMT) looks headed for decline.

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british american tobacco / imperial tobaccoImperial Tobacco (LSE: IMT) (NASDAQOTH:ITYBY) has recorded strong rises in earnings per share (EPS) for five years in a row now — and although forecasts suggest a flat year for 2014, there’s a 5% EPS rise pencilled in for 2015.

On top of that, dividend yields topped 5% in 2013, with 5.5% expected this year and more than 6% in 2015.

And with the shares currently priced at 2,380p, they’re on a forward price-to-earnings (P/E) ratio of only 11! Must be a great candidate for some of your 2014 ISA allowance of  £11,760 then?

Nope! And here’s why I think not…

Declining industry

When Imperial Tobacco reported first-quarter results to December 2013, the firm was able to reveal a 2% rise in its “growth” brand volumes, with an 8% rise in growth markets — growth brands accounted for 39% of Imperial’s net revenue.

But that was against a background of falling volumes across the industry, with Imperial telling us of a 5% decline. Total net revenue for the quarter fell 6% as reported, although Imperial said there was a 1% underlying rise.

Looking back to last 2013’s full-year results, Imperial saw revenue flat with growth brand volumes actually falling a little — but adjusted EPS gained 5% and the firm lifted its dividend by 10%.

Falling volumes

But “market conditions remain tough“, we were told, and Imperial’s total volumes in stick terms fell 7% to 341 billion.

Investors today are likely to enjoy a few more years of very nice dividends, and maybe some share price growth, so why wouldn’t I have Imperial Tobacco in an ISA?

Future history?

It’s down to my thought that the tax-free allowance is likely to do you more good if you use it with a very long-term horizon (although I confess that’s my feeling about investing in general). And I’d only want a company in my ISA if I thought it would be looking a lot stronger in 20 years’ time.

The tobacco business 20 years from now? Many will hope to see it facing extinction, and I wouldn’t be at all surprised to see it well on its way.

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.

> Alan does not own any shares in Imperial Tobacco.

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