A few years ago, many were thinking the tobacco business couldn’t have much more life in it. But after a minor slump ended in mid-2013, share prices have been soaring. In fact, between late August 2013 and today, shares in Imperial Tobacco (LSE: IMT) have put on 63% to 3,509p, while at the same time paying 4% to 5% per year in dividends.
That’s been accompanied by modest but steady growth in earnings, so that even after the rise the shares are still on a modest forward P/E of only 15 — which isn’t bad for a forecast dividend yield of 4.4%.
But can the growth keep on going? Well, Imperial released full-year results today, reporting a 7% rise in underlying volumes for its higher-margin Growth brands, and net revenue up 12% — Growth and Specialist brands now account for 57% of the company’s net revenue. With a developing world becoming increasingly affluent, there are plenty more aspiring customers out there to be upsold to.
Still cheap
Broadcaster ITV (LSE: ITV) has also been on a roll, with its shares almost quadrupling in value in just four years, to 256p. There’s a serious profit performance behind that too, with EPS up by almost a quarter last year following on from a similar rise the year before — and the City’s analysts are predicting at least two more years of double-digit growth that would take the P/E to only 14.5 in 2016. Dividends are yielding a fairly modest 2.5% or so, but they’re rising way faster than inflation each year.
First-half results this year support the optimism, bringing in a 25% rise in adjusted pre-tax profit and allowing the firm to lift its interim dividend by 36%. Chief executive Adam Crozier told us that “All parts of the business performed well“, so things look good — and I don’t see any clouds on the horizon.
Overstretched
Over at Associated British Foods (LSE: ABF), we’ve just had full-year results that included a 6% drop in adjusted pre-tax profits, with chief executive George Weston speaking of “the challenges of food commodity deflation and big movements in exchange rates“. But the dividend was lifted 3% to 35p, although that does only provide a 1% yield on today’s share price of 3,418p.
That share price is a result of a 150% climb in the past three years, but it has resulted in a trailing P/E of 30, rising to nearer 34 based on 2016 forecasts. How can such a high rating be justified?
It’s mostly down to Primark (which is nothing to do with the firm’s food business), but though I think Primark is a good business, I can’t see it being good enough to support such a high valuation in the long term — by comparison, NEXT is on a forward P/E of only 18, and offers dividend yields of 5%.
I reckon the rises at Imperial Tobacco and ITV stand a very good chanced of continuing on up, but ABF’s must surely be running out of steam, mustn’t it?
