Does Imperial Tobacco Group PLC Still Offer Returns After A 25% Rise This Year?

Imperial Tobacco  (LSE: IMT) has been a truly incredible performer over the last 16 years. Overall it is up over 500% and currently sits near the all-time high at 3,563p. Its shares have been in the news recently regarding a potential takeover but is this all hype or does Imperial still offer good returns? 

I have held Imperial Tobacco for years, as I initially wanted the stable dividend that tobacco stocks offer. However, the company has outperformed hugely and has made a fantastic return. In the current environment, cigarette companies need to be relatively creative to keep profits up. Cigarette volume is declining around the sector but Imperial Tobacco has managed to keep profits up and increase the dividend, which has placed the shares in demand. Large cigarette companies like Imperial Tobacco are lucky to have very little competition and that a few big companies own most of the brands around the world. 

This good run looks set to continue. The company recently acquired brands from the Reynolds American takeover of Lorillard. This increases Imperial’s market share of the huge US market to 10% from the previous 3%. A key brand in this deal is the new e cigarette brand called Blu. This looks to be a highly valuable growth brand that should grow Imperial’s earnings in the future. 

The company has recently been involved in takeover rumours with a possible acquirer coming from Asia. Japan Tobacco has been mentioned as a potential acquirer, with the help of British American Tobacco. This would not surprise many analysts who say Imperial has always been a takeover target. These rumours don’t mean Imperial is a slam-dunk buy, however, and takeover rumours must always be taken with a pinch of salt. They have, though, added fuel to the share price — but I still believe the price will push on up even if there is no takeover. 

The dividend yield is at 4.1% and the dividend cover is 1.25. The P/E ratio is also only around 15, which is less than its main rivals including BATS. The dividend is also set to increase in the next few years and 2015 earnings grew by over 18%. These earnings are set to increase further as the new US brands boost earnings higher.   

The bullish view on Imperial is also shared by Britain’s most loved fund manager, Neil Woodford. His CF Woodford Equity Income Fund has increased its holding of Imperial, and it now accounts for 7.8% of his entire fund. 

Overall, Imperial offers good returns in the next few years as its new brands begin to grow further. The yield of around 4% is very healthy and should increase in the next few years. If the company is taken over then so be it, but City analysts still see it as unlikely. The shares still remain a good potential investment, especially for income-seeking investors, over the long term. 

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Jack Dingwall has shares in Imperial Tobacco. 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.