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3 Smoking Reasons To Take The Plunge With Imperial Tobacco Group plc

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Today I am looking at why I believe Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) is primed to deliver spectacular shareholder returns.

Growth brands keep on delivering

A combination of escalating health concerns and constrained consumer spending power continues to weigh heavily on the cigarette industry. Despite this, Imperial Tobacco’s fantastic portfolio of industry-leading brands — which includes the likes of John Player Special and Davidoff — is instead helping to propel group revenues higher.

This month’s interims showed volumes across these ‘Growth Brands’ rise 2% during September-December, in turn pushing group tobacco revenues 1% higher. These labels now account for 43% of group volumes versus 40% during the corresponding 2012 period. With the company “focusing on driving our Growth Brands and targeting opportunities in our Growth Markets,” I expect Imperial Tobacco’s key labels to continue flying off the shelves.

Developing market demand ratcheting higher

The runaway success of these labels keeps on pushing Imperial Tobacco’s already-weighty presence in these ‘Growth Markets’, and sales of these brands advanced 8% in these territories during the three-month period. Indeed, tobacco net revenue advanced 3% in September-December, outpacing growth of 1% in its traditional Western markets.

The firm noted particular strength in Indochina, the Middle East and Russia. And even though volumes dropped in Russia during the final three months of 2013, the excellent pricing power of Imperial Tobacco’s premier brands — combined with a solid product mix — helped to combat this problem.

The cigarette manufacturer’s scheme to shutter a swathe of underperforming local brands still has plenty of distance to run, a factor which should push developing market consumption steadily higher in coming years.

Dizzy dividend yields set to continue

The tobacco has been a long-standing favourite for dividend investors, and Imperial Tobacco is one of the sector’s more generous payers. The firm has increased the annual payout by more than double-digit percentages over the past five years, while its £500m per annum share buyback scheme also underpins its reputation as a sterling income pick.

And forecasters anticipate the dividend to continue rising at a fair clip in the coming years. A payment of 116.4p per share for the 12 months concluding September 2013 is expected to rise to 127.1p this year, before advancing to 139.2p in 2015. Such projections result in chunky yields of 5.5% and 6.1% correspondingly, comfortably exceeding a prospective average of 3.2% for the complete FTSE 100.

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> Royston owns shares in Imperial Tobacco Group.