This Week’s Top Blue-Chip Income Buy: Imperial Tobacco PLC

I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.

Right now, I reckon Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) is looking a great buy for income.

There are bull and bear views on all companies — that’s what makes a market.

For my part, I’ve found it generally profitable to make two assumptions: first, that a company has far more information, inside knowledge and experience of its markets than an armchair analyst like me, and, second, that what a company does with its dividend is a reasonably good indicator of management’s confidence, or caution, on the outlook for the business.

When management’s policy on the dividend is robustly at odds with a bearish view of the company, I’m inclined to think the bears have overestimated their own powers of analysis.

A great opportunity right now

A generally bearish view on the tobacco sector has prevailed over the last 18 months or so: Imperial Tobacco’s shares are currently trading at around £23 compared with up to £26 during the spring of 2012.

Earlier this year, the company paid a 35.2p interim dividend, and this month declared a final of 81.2p (which anyone investing before the ex-dividend date of 15 January will pick up). The full-year payout of 116.4p represents a smokin’ yield of 5.1%.

Significantly, in my view, what Imperial Tobacco will be doing with its dividend contrasts starkly with a bearish outlook. Management said, in the recent results: “Our intention is to grow dividends ahead of adjusted earnings and by at least 10% per year over the medium term”.

That means next year’s dividend will advance from 116.4p to at least 128p, giving a yield of 5.6%.

Now, there is a prevailing low-inflation environment, many companies are only delivering dividend growth at or modestly above the rate of inflation, and Imperial Tobacco already offers a higher yield than most. I can see no earthly reason for directors to go so far out on a limb as to tout dividend growth of 10%+ per annum, other than the highest degree of confidence in the outlook for their company.

Because of the juicy 5.6% income, increasing by at least 10% a year for the foreseeable future, I rate Imperial Tobacco a great buy for income investors right now.

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> G A Chester does not own any shares mentioned in this article.