5.5 Exceptional Reasons That May Make Imperial Tobacco Group plc A Buy

Today I am describing why I believe Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) is a shrewd choice for those seeking bumper dividends.

A smoking dividend selection

Cigarette manufacturers are a well-established haven for savvy dividend hunters owing to their defensive qualities, and Imperial Tobacco remains a popular pick in this regard. Indeed, the City’s number crunchers expect the business to shell out another blockbuster payout this year, with the company currently carrying a hefty 5.5% dividend yield.

Imperial Tobacco, whose portfolio of ‘Growth Brands’ includes the likes of Gauloises Blondes, Davidoff, West and John Player Special, reported this week that tobacco net revenues and adjusted operating profit both remained flat year-on-year, at £7bn and £3bn respectively.

And although a 2% decline in volumes at its premium brands, to 129bn, underlined the challenging market backdrop facing the firm, a 2% revenues improvement from these labels illustrated the excellent pricing power therein.

The company’s financials also revealed the huge upside which its ambitious transformation programme still has to offer. This includes investing heavily in its marquee brands and shuttering underperforming labels, through to implementing stringent cost-management schemes. Indeed, cost-cutting measures delivered £30 million last year, Imperial Tobacco said, and the business remains on track to save £300 million per annum by 2018.

Imperial Tobacco has consistently built the full-year dividend for several years now, and payouts over the past five years have punched a compound annual growth rate of  9.8% during the past five years.

And City forecasters expect dividend growth of 10.2% for the year concluding September 2013, to 116.4p per share, to advance an additional 9.5% this year to 127.5p. And with this projection translating to a 5.5% dividend yield, this comfortably surpasses the 3.1% forward average for the FTSE 100 and corresponding reading of 4.1% for tobacco rival British American Tobacco.

I purchased shares in Imperial Tobacco owing primarily to its impressive dividend record, though the company also offers  great value when viewed against potential earnings.

The cigarette maker is expected to punch another year of earnings growth in the 12 months to September 2014, with a 5% expansion to 220.9p per share pencilled in. This leaves the company dealing on a P/E rating of 10.8, just above the bargain benchmark of 10 times projected earnings. And I believe that earnings should accelerate higher in future years as its transformation plan clicks through the gears.

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> Royston owns shares in Imperial Tobacco Group, but does not own shares in British American Tobacco.