Should You Buy ‘Mega Yielders’ British American Tobacco plc & Premier Farnell plc?

Royston Wild looks at the investment potential of British American Tobacco plc (LON: BATS) and Premier Farnell plc (LON: PFL).

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Today I am looking at two London stocks expected to deliver delicious returns.

Cigarette maker set to soar

The tobacco sector has long been a happy hunting ground for those seeking dependable dividend growth year after year. The terrific earnings visibility associated with their defensive operations has made the likes of British American Tobacco (LSE: BATS) a strong performer for income seekers, and I expect this trend to continue well into the future.

The company’s portfolio of market-leading brands like Pall Mall and Lucky Strike carry formidable pricing power that enable the business to keep revenues growing irrespective of wider pressure on consumers’ wallets.

On top of this, British American Tobacco’s decision to enter hot growth segments like e-cigarettes also provides the firm’s revenues outlook with plenty of ammunition.

The business has already entered the market through its Vype technology, and its decision to ink a technology-sharing agreement with Reynolds American earlier this month could push its vapour-related sales onto the next level.

My positive take is shared by the Square Mile’s fleet of number crunchers, and British American Tobacco — shrugging off a marginal earnings decline — is expected to lift the dividend in 2015, to 156.2p per share from 148.1p last year. Consequently the business offers a market-mashing 4.1% yield for the period.

And supported by a 7% bottom-line improvement in 2016, the cigarette play is anticipated to lift the dividend yet again, to 164.3p and thus pushing the yield to 4.3%.

Electronics play on the back foot

I believe the dividend outlook over at electronics manufacturer Premier Farnell (LSE: PFL) is far less assured than that of its FTSE peer, however.

The Leeds-based business advised on Thursday that group sales per day in the third quarter grew by a meagre 0.5% between August and October, although revenues would have dipped 2.3% had it not been for the success of its Raspberry Pi budget computer systems.

Consequently Premier Farnell advised that “operating profit [this year] is expected to be in line with previous guidance, albeit towards the lower end of the profit range.”

The company said that sales in Europe and the Americas continued to fall, adding that “a more challenging trading environment in the industrials space” in the latter territory — a region from which a third of revenues are generated — remains a headache.

The City expects Premier Farnell to fork a full-year dividend of 6.2p per share for the years ending January 2016 and 2017, down from 10.4p in recent years although still yielding an eye-watering 6%.

But given that conditions in its all of its markets bar Asia remain difficult — Premier Farnell elected to cut the interim dividend by more than 40% in September in light of these issues — I believe current payout projections could fall well wide of the mark.

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 considered so you should consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. 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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