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Can The Surges At Imperial Tobacco Group PLC, ITV plc And Associated British Foods plc Keep On Going?

A few years ago, many were thinking the tobacco business couldn’t have much more life in it. But after a minor slump ended in mid-2013, share prices have been soaring. In fact, between late August 2013 and today, shares in Imperial Tobacco (LSE: IMT) have put on 63% to 3,509p, while at the same time paying 4% to 5% per year in dividends.

That’s been accompanied by modest but steady growth in earnings, so that even after the rise the shares are still on a modest forward P/E of only 15 — which isn’t bad for a forecast dividend yield of 4.4%.

But can the growth keep on going? Well, Imperial released full-year results today, reporting a 7% rise in underlying volumes for its higher-margin Growth brands, and net revenue up 12% — Growth and Specialist brands now account for 57% of the company’s net revenue. With a developing world becoming increasingly affluent, there are plenty more aspiring customers out there to be upsold to.

Still cheap

Broadcaster ITV (LSE: ITV) has also been on a roll, with its shares almost quadrupling in value in just four years, to 256p. There’s a serious profit performance behind that too, with EPS up by almost a quarter last year following on from a similar rise the year before — and the City’s analysts are predicting at least two more years of double-digit growth that would take the P/E to only 14.5 in 2016. Dividends are yielding a fairly modest 2.5% or so, but they’re rising way faster than inflation each year.

First-half results this year support the optimism, bringing in a 25% rise in adjusted pre-tax profit and allowing the firm to lift its interim dividend by 36%. Chief executive Adam Crozier told us that “All parts of the business performed well“, so things look good — and I don’t see any clouds on the horizon.

Overstretched

Over at Associated British Foods (LSE: ABF), we’ve just had full-year results that included a 6% drop in adjusted pre-tax profits, with chief executive George Weston speaking of “the challenges of food commodity deflation and big movements in exchange rates“. But the dividend was lifted 3% to 35p, although that does only provide a 1% yield on today’s share price of 3,418p.

That share price is a result of a 150% climb in the past three years, but it has resulted in a trailing P/E of 30, rising to nearer 34 based on 2016 forecasts. How can such a high rating be justified?

It’s mostly down to Primark (which is nothing to do with the firm’s food business), but though I think Primark is a good business, I can’t see it being good enough to support such a high valuation in the long term — by comparison, NEXT is on a forward P/E of only 18, and offers dividend yields of 5%.

I reckon the rises at Imperial Tobacco and ITV stand a very good chanced of continuing on up, but ABF’s must surely be running out of steam, mustn’t it?

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.