Today I am detailing why I believe Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) is a terrific dividend pick.
Smoking yields on the table
Imperial Tobacco, like the rest of the world’s major tobacco plays, has been a firm favourite with voracious income hunters for many, many years. The dependable nature of cigarette demand, and consequently solid earnings growth, has enabled it to consistently grow the annual
payout for many years now — indeed, the business has raised the dividend at a compound annual growth rate above 12% since 2009.
However, many have questioned whether the tobacco sector will be able to continue shelling out generous payments in the coming years, as rising health concerns, pressure on consumer spending power, and rising anti-smoking legislation are becoming increasingly detrimental for product consumption.
Despite these fears, however, City brokers expect Imperial Tobacco to maintain its ultra-progressive dividend policy in the medium term at least. Current forecasts point to a 10% payout rise for the year concluding September 2014, to 128.2p per share, with an additional 9% increase chalked in for next year to 140.2p.
Such projections create enormous yields of 4.8% and 5.2% for 2014 and 2015 respectively, smashing a forward average of 3.2% for the FTSE 100.
Investing for the future
Imperial Tobacco has seen earnings gradually decline during the past five years owing to declining cigarette demand, and the company is expected to post its first annual earnings drop for many moons in 2014, with a 4% decline pencilled in.
Still, the effect of significant cost-cutting, and greater investment in its ‘Growth Brands’ like John Player Special and West, is expected to get earnings moving back in the right direction, however — expansion to the tune of 7% is expected in fiscal 2015.
These figures leave the company with dividend coverage of 1.6 times forward earnings through to the end of next year, below the security benchmark of 2 times but which hardly makes for catastrophic reading.
Meanwhile, Imperial Tobacco’s foray into the explosive e-cigarette market should also underpin solid earnings and income growth, a position which the firm bolstered through the purchase of the blu vapour brand from Reynolds American this month. The label currently commands 45% of the huge US e-cig market.
With Imperial Tobacco also boosting its exposure to the highly lucrative North America marketplace through the purchase of traditional tobacco brands including as Winston and Kool, I believe that the firm should continue doling out considerable income flows well into the future.
