Just when you might have thought the tobacco industry was heading for terminal decline, forecasts for Imperial Tobacco (LSE: IMT) are looking attractive.
We’ve seen earnings growth slowing in the sector in recent years — from an 18% boost to earnings per share in 2009, Imperial’s EPS only grew by 10% the following year, and that fell back to just 5% growth in 2103.
Lower volumes, higher margins
The problem has been a decline in smoking, with actual volumes dropping year-on-year. But against that, the top tobacco firms have been focusing their efforts more on their higher-margin premium brands, and they’ve been doing a decent job of it.
Although EPS growth is expected to come to a complete halt at Imperial for the year ending September 2014, the City is expecting a pick-up to 5% growth in 2015 and for that to be repeated a year later.
Cash on the rise
What’s more remarkable is the current consensus for dividends. The 116.4p per share paid in 2013 represented a yield of 5.1%, and that’s pretty good by anyone’s standards.
This year there’s a boost to 128p predicted, which would yield 5% on today’s share price of 2,564p — and a further rise to 140p in 2015 would bring us a 20% hike in the dividend over two years. Find me an income investor who wouldn’t be impressed by that!
Dividends rising ahead of earnings will bring the cover down, of course — from 2013’s cover of 1.81 times, we should see a significantly lower multiple of 1.57 times by 2015. But if the industry is moving away from volume growth and more towards brand-driven marketing efforts, a generally lower level of dividend cover may well prove to be sustainable.
The City likes it
And if the forecasters are to be believed, we should be buying in to Imperial’s business model and snapping up the shares — eight out of 18 have placed a Strong Buy rating on them, with a ninth in support on a mere Buy. There are only two real dissenters, with Strong Sell ratings — the rest are sticking with Hold.
Ethics will come into it for a lot of people contemplating buying Imperial Tobacco shares. But putting that aside, with the shares on a forward P/E of under 12 based on 2015 forecasts, there’s a strong investment case for the company — at least for the medium term.