Why Imperial Tobacco Group PLC Should Be A Loser This Year


The near and mid-term future is starting to look rosy again for many of our top FTSE 100 companies. But in my perusal of them today, I come to one that I feel less positive about, and that’s Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US).

While the FTSE picked up around 12% over the past 12 months, Imperial Tobacco is down 10% to around 2,260p.

Why? Let’s start with a look at some figures from the past five years, together with the current analysts’ consensus:

Sep Pre-tax EPS Change Dividend Change Yield Cover
2009 £945m 161.8p +18% 73.0p   4.0% 2.2x
2010 £2,118m 178.8p +10% 84.3p +15% 4.4% 2.1x
2011 £2,153m 188.0p +5% 95.1p +13% 4.4% 2.0x
2012 £1,081m 201.0p +7% 105.6p +11% 4.6% 1.9x
2013 £1,261m 210.7p +5% 116.4p +10% 5.1% 1.8x
2014* £2,545m 213.6p +1% 127.0p +9% 5.7% 1.7x
2015* £2,616m 224.9p +5% 138.9p +9% 6.3% 1.6x

* forecast

Looking good?

On first glance, things don’t look so bad there. There’s no real earnings growth forecast for the year to September 2014, but it looks like it might start to pick up again in 2015. And though dividend growth is slowing, it’s not by that much and 9% per year is still pretty impressive.

All in all, those headline figures for Imperial Tobacco are similar to those from British American Tobacco, which I looked at earlier this month. But again, we need to look at the bigger picture.

Maybe not

Imperial Tobacco has done a good job of keeping its dividends growing, and the 5.7% forecast for 2014, followed by 6.3% the year after, does look very tempting. But look at the way the dividend cover has been falling year-on-year. Imperial started with better cover than British American, and that’s allowed it to keep those payments going.

However, dividend rises in excess of earnings each year cannot be maintained in the long term, and if the trend we see in the table continues, those rises will at least have to slow.

Gloomy trend

If we take a look at Imperial Tobacco’s last set of full-year figures, for the year ended 30 September 2013, we see much the same picture as we saw at British American.

The company is talking glowingly of “enhanced quality of growth“, stressing its progress in its growth brands and growth markets — and, to be fair, revenue from the firm’s growth brands rose 2%, with growth-market revenue also up 2%.

But actual volumes, in terms of stick-equivalents, fell by 7% from a year previously.

What Imperial is doing, in the exact same way as its competitors, is focusing on boosting its margins from its high-status brands in order to keep profits up. That might work well for a few more years, but in a world in which tobacco consumption is falling, the strategy can surely only help slow the overall decline of the industry.

Still too high

Imperial Tobacco’s shares have fallen in price, and the consensus forecast puts them on a P/E of around 10.5 for 2014, falling to 10 for 2015. In the short term, that looks cheap, especially with those dividends — but with the future of the business looking bleak, I think they’re still too expensive.

Verdict: Further out of favour in 2014!

Finally, if Imperial Tobacco dividends might look under threat, there are many alternatives out there that should remain strong for years to come. If you want to learn how to identify them for yourself, have a look at the new Motley Fool report "How To Create Dividends For Life", which gives you 5 Golden Rules for Building a Dividend Portfolio.

It's completely free, so click here to get your copy while it's available.

> Alan does not own shares in Imperial Tobacco or British American Tobacco.