Are these 2 stocks income plays or growth prospects?

Now here’s a couples of riddles for you. Which renowned FTSE 100 income play is actually a growth monster? And which former growth prospect is now only admired for its income?

Imperial might

The answer to the first riddle is tobacco giant Imperial Brands Group (LSE: IMB). Income seekers light up at the name but growth investors can easily get hooked too. The stock is up 15% over the last year (against 9% on the FTSE 100 as a whole). Over five years, the figure is 72% (against 33%). And over a decade, the share price has grown a smoking 114%. That doesn’t include re-invested dividends, so the total return is far higher.

The yield looks less addictive at 3.56%, just below the FTSE 100 average of 3.69%. There’s a positive reason for that, naturally. When the share price rises rapidly the yield inevitably slips, as management has to hike dividends at a fair lick to keep pace.

Imperial Brands’ management is doing its best, with plans to increase the dividend by at least 10% a year over the medium term. The forecast yield is 4.3% for 30 September 2017. Earnings per share (EPS) growth of 16% this year and a forecast 14% next year suggest it will be generating enough cash to cover this, as well as cutting net debt by 20% over the next four years. For those who are happy to have tobacco stocks in their portfolio Imperial Brands offers an intoxicating blend of both income and growth. 

Food for thought

And so to my second riddle: the growth stock that’s now an income stock. The answer is ailing grocer J Sainsbury (LSE: SBRY) whose long-term performance figures are spookier than Halloween. It’s down 9% over one year, 20% over five years and almost 40% over 10 years. Growth wise, this is a zombie stock. As the supermarket price war deepens, and inflation puts more pressure on shoppers’ pockets, it seems likely to remain among the undead.

The dividend looks a lot more lively, currently yielding a tasty 5%, which is one of the advantages of a plummeting share price. However, it can’t be relied on. In May the board cut the final dividend to 8.1p a share, from 8.2p one year earlier, shrinking the total annual payout from 13.2p to 12.1p, a drop of 8.33%. Dividend cover looks good at two but the yield is still forecast to drop to 4.4%.

Casualty of war

This dwindling income stream is a worry given that the supermarket food price war shows little sign of abating, and inflation is likely to put pressure on shoppers’ pockets next year. Wafer thin 3% margins are forecast to drop to an even skinnier 2.4%, and the supermarket’s best and last hope is that chief executive Mike Coupe can make success of integrating his new Argos acquisition, to diversify away from the sickly grocery sector.

Imperial Brands is clearly the better prospect but its valuation of 18.53 times earnings is far higher than 10.08 at Sainsbury’s. There’s no riddle to that: you have to pay for superior quality.

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