On the face of it, results released today by Imperial Tobacco (LSE: IMT) were disappointing. For instance, for the half-year to March 31 revenue fell by 5% to £12.7 billion, while operating profit was 17% lower at £999 million.
The Real Numbers
However, the results do not paint the full picture, since Imperial Tobacco was hit by various one-off items that, when removed, show that the company is in relatively good shape. For example, the company is working with wholesalers and distributors to reduce the amount of inventory they keep on hand, which should reduce the amount of time it takes for cigarettes to get from factory to consumer and meant sales were lower than they otherwise would have been.
In addition, negative currency returns impacted figures and excluding these effects (as well as the impact of the inventory reductions) means that revenue for the half-year was up 2%. Although not a vast gain, it is far better than the reported figure and shows that Imperial Tobacco is making progress in what it forecast would be a slow-growth year.
Targeted Growth
Meanwhile, Imperial Tobacco’s focus on its key brands (including Davidoff and Gauloises) seems to be paying off, with the ‘super brands’ delivering 4% growth for the half-year. Although bottom-line improvements for the full-year are expected to be very modest, Imperial Tobacco continues to offer investors generous growth when it comes to dividends per share.
Indeed, the company expects to increase dividends per share by 10% this year and, encouragingly, it appears to have scope to increase it further in future years. That’s because Imperial Tobacco is scheduled to pay out just 61% of net profit as a dividend in 2014, which is not particularly high given the relatively stable nature of its earnings.
Looking Ahead
Although growth prospects for this year are minimal, Imperial Tobacco is expected to deliver mid single-digit growth in earnings per share (EPS) over the coming years. This, combined with a renewed focus on its core brands, the scope for strong dividend per share growth and a valuation that is relatively attractive (Imperial Tobacco’s price to earnings (P/E) ratio is 12.1 versus 13.6 for the index), means that Imperial Tobacco has a significant amount of potential. While the headlines may focus on the reported figures, as ever the devil is in the detail.