Why I Would Buy Imperial Tobacco Group PLC, Rolls-Royce Holding PLC And International Consolidated Airlins Grp SA

Royston Wild highlights the investment case for Imperial Tobacco Group PLC (LON: IMT), Rolls-Royce Holding PLC (LON: RR) and International Consolidated Airlins Grp SA (LON: IAG).

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Today I am looking at three London-listed heavyweights on the charge.

Imperial Tobacco Group

Cigarette giant Imperial Tobacco (LSE: IMT) has undergone significant restructuring to mitigate falling product sales, shuttering dozens of underperforming local labels and ploughing increasing sums into ‘Growth Brands’ like West and Davidoff. So news today that the business received US regulatory approval to acquire blue ribbon cartons like Winston and Kool from Reynolds American provides another significant boost to its turnaround strategy.

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The deal also bolsters Imperial Tobacco’s position in the white-hot e-cigarette market as the blu product is also thrown into the deal — the label is North America’s most popular vapour brand. In light of these measures the City expects the tobacco play to recover from last year’s modest earnings slip and record growth of 1% and 3% in 2015 and 2016 correspondingly.

These figures leave Imperial Tobacco changing hands on P/E multiples of 16.4 times for this year and 15.6 times for the following year, just outside the watermark of 15 times which represents attractive value. Still, I believe that the cigarette play’s generous dividend policy more than offsets this — prospective payouts of 142p per share for 2015 and 155.1p for 2016 create juicy yields of 4.3% and 4.7% correspondingly.

Rolls-Royce Holding

I have long argued that recovering defence spend in Western economies should bolster the revenues performance at Rolls-Royce (LSE: RR), particularly as the firm’s unrivalled pedigree as a supplier of market-leading hardware makes it a favourite for military and civil customers the world over. And this reputation was underlined today by news that it will supply almost 600 engines for the British Army’s brand new SCOUT armoured vehicle in a deal worth €80m.

The latest accord follows a spate of aircraft engine supply contracts from civil customers such as Turkish Airlines and Emirates, a hot growth spot from which Rolls-Royce can generate a fortune from lucrative aftermarket services. So although problems in the oil industry are expected to push earnings at the London firm 9% lower this year, the long-term outlook remains strong and a 6% bounceback is forecast for 2016.

Like Imperial Tobacco, Rolls-Royce deals on fractionally-high P/E multiples of 17 times and 16 times for this year and next. And prospective dividends of 23.7p per share for 2015 and 25.9p for 2016 create handy-if-unspectacular yields of 2.3% and 2.5% respectively. Still, I believe recovering defence spend and surging commercial plane demand makes Rolls-Royce a terrific selection for long-term investors.

International Consolidated Airlines Grp

Speaking of which, in my opinion International Consolidated Airlines (LSE: IAG) is a solid candidate for those seeking exceptional growth in the coming years as passenger numbers continue to soar. And the business received a boost in midweek trading as its protracted purchase of Aer Lingus edged a step closer, the Irish government having agreed to sell its 25% stake in the domestic carrier as part of the British firm’s €1.4bn takeover plan.

The budget airline segment offers massive potential for International Consolidated Airlines and its rivals, and is an area which the Heathrow firm has already entered following the purchase of Vueling back in 2012. With its British Airways and Iberia operations also performing splendidly, the number crunchers expect the company to record explosive earnings growth of 75% and 19% in 2015 and 2016 respectively.

As a result International Consolidated Airlines deals on P/E multiples of just 10.6 times for this year and 8.9 times for 2016 — any reading below 10 times is widely regarded as too good to pass on. On top of this, the operator also offers tasty yields of 2.1% and 2.7% for these years, amid predicted dividends of 15.8 euro cents per share for 2015 and 20.7 cents for 2016.

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Royston Wild owns shares of Imperial Tobacco Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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