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Could this stock better Imperial Brands plc for growth and income?

Imperial Brands (LSE: IMB) is many people’s idea of a growth-and-income champion. This FTSE 100 tobacco group delivers reliable earnings growth, while prodigious cash generation supports a generous and increasing dividend.

Today, I’m going to look at the prospects and current valuation of the company and at another blue-chip contender for the growth-and-income crown.

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Set fair

Imperial released its annual results on Tuesday for what it described as an important year for progress. In a tough trading environment, it advised it had gained market share in most of its priority markets. And despite increased investment, earnings advanced 7% to 267p thanks to favourable currency movements. Meanwhile, 91% cash conversion supported a ninth consecutive year of 10% dividend increases, taking the payout to 170.7p (64% of earnings).

Imperial’s shares are trading at around 3,150p, as I’m writing, which gives a trailing price-to-earnings (P/E) ratio of 11.8 and a running dividend yield of 5.4%. These metrics suggest to me that the stock continues to be an excellent choice for both growth and income. The company is confident the business is set fair to deliver sustainable growth and value for shareholders. This confidence is emphasised by the board’s continuing policy to increase the dividend by 10% a year.

Tobacco companies have continued to thrive even through decades of rising health awareness and increased regulation, while there is little threat to the incumbents from new entrants into the market. As one of the big players and with its shares trading at an attractive valuation, I rate Imperial a ‘buy’.

Excellent business

Fellow FTSE 100 firm Coca-Cola HBC (LSE: CCH), which released a trading update today, is one of the biggest bottling partners of The CocaCola Company. It operates in 28 countries “from Ireland in the west to the Pacific coast of Russia in the east, from the Arctic Circle in the north to the tropics of Nigeria in the south.”

Today, the company reported a strong Q3 performance, with net revenue up 5%. Management told us: “We go into the final quarter encouraged by our progress and confident in delivering on our expectations for the full year.”

City analysts are forecasting full-year earnings per share of €1.14 (101p at current exchange rates), 20% ahead of last year. This supports a forecast 18% increase in the dividend to €0.52 (46p). The shares are trading at around 2,600p, giving a P/E of 25.7, which is markedly higher than that of Imperial. Meanwhile, its dividend yield is significantly lower at 1.8%, partly due to a less generous payout ratio of 46%.

Coca-Cola HBC is an excellent business with a tremendous economic moat and has potential to grow its top line at a faster rate than its tobacco peer. In my view, it merits a premium P/E at least in line with other high-quality companies in the drinks sector, such as Diageo. However, the current rating of 25.7 is somewhat above the level I’d be willing to pay, so, much as I like the business, I’d be inclined to hold off in the hope of a lower entry point.

5 shares to retire on

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.