Despite the FTSE 100 not delivering on its New Year hope, Imperial Tobacco (LSE: IMT) has made a great start to the year. Indeed, while the FTSE 100 is currently down over 2% since the start of the year, Imperial Tobacco is up 6% year-to-date. However, this doesn’t necessarily mean that Imperial Tobacco will run out of steam.
A Stunning Yield
Although inflation has fallen in recent months, interest rates are still at historic lows. So, a great yield is still likely to tempt investors and, on this front, Imperial Tobacco excels. Shares currently offer a yield of 5.1%, which is roughly three times the rate of inflation and could mean that investors continue to see the stock as attractive, especially since the FTSE 100 currently yields only two-thirds of this at 3.4%.
Tempting Valuation
A high yield also indicates that shares are cheap, which is backed up by Imperial Tobacco’s price-to-earnings (P/E) ratio. Despite rising by 6% already this year, Imperial Tobacco trades on a P/E of just 11.9, which is below that of the FTSE 100 on 13.3. Certainly, Imperial Tobacco’s growth prospects for the current year are nothing to shout about (EPS is expected to grow by just 1%) but next year looks much better, with the bottom-line forecast to increase by 5%. This is in-line with the index forecast and highlights that, while Imperial Tobacco is not necessarily a super growth stock, it is still able to keep up with index peers over the medium term.
A Defensive Play
Although the UK economy is making huge strides towards recovery, global events such as a deepening of the Ukraine crisis, a further slowdown in China’s growth rate and the response of the US economy to a tapering of the Federal Reserve’s monthly asset repurchase programme could all cause setbacks to the UK stock market. Therefore, defensive shares (such as Imperial Tobacco) shouldn’t be overlooked, even by optimistic investors.
On this front, Imperial Tobacco adds value. Its beta is just 0.5, which means that for every 1% fall in the wider market it should (in theory) fall by 0.5%. The same is, of course, true (in theory) should the stock market rise. It does, however, show that Imperial Tobacco could serve a useful purpose in stabilising a portfolio and in reducing volatility.
Looking Ahead
With a great yield, an attractive valuation and defensive properties, Imperial Tobacco could prove to be a winner. With sentiment being upbeat thus far in 2014, it could be all set for a strong performance during the remainder of the year.
