Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US) has always been viewed as an impressive income stock. However, it seems as though the prospects for income seeking investors are set to improve somewhat in future years, as the company is expected to increase the amount it pays to shareholders in the form of a dividend.
Indeed, the market is expecting the company to increase dividends per share for the year to 30 September 2014 by a whopping 9.6% versus the same period in the prior year.
This is extremely impressive and trumps the growth rate in dividends per share offered by a whole host of utility companies and other stocks that are considered to be cornerstone income plays.
Therefore, it must be said that Imperial Tobacco looks to be a very interesting company for private investors who are concerned about the dual effects of stubbornly high inflation and historically low interest rates.
Of course, Imperial Tobacco is suffering (along with its sector peers) from declining sales volumes of cigarettes. Quarterly updates from the firm continually paint the same picture of volume decline which is more than made up for by price rises, meaning sales growth remains fairly robust.
I wonder, though, whether the stock market has become so attuned to the volume falls that a positive surprise on this front could mean that shares gain a major boost. In other words, volume declines seem to be priced in, so better than expected figures (in terms of numbers of cigarettes sold) could cause shares to head north at a brisk pace. Even if volumes do continue to fall, the expectation of this may not cause shares to fall by a large amount.
In terms of whether shares offer good value, Imperial Tobacco currently trades on a price to earnings (P/E) ratio of 11.2. This looks a tad low for an attractive income stock that has defensive properties and a very reliable (and visible) revenue stream, meaning shares appear to offer good value on an absolute basis.
However, when compared to the wider index and to the consumer goods industry group (to which Imperial Tobacco belongs) things become a lot more interesting. They trade on P/Es of 15.5 and 15.7 respectively, highlighting the good value that Imperial Tobacco offers on a relative basis too.
So, dividend growth forecasts, the potential for positive surprises on volumes and a low P/E ratio are key reasons why Imperial Tobacco could be attractive to a private investor.
Peter does not own shares in Imperial Tobacco.