After Today’s Trading Update, Is Imperial Tobacco Group PLC A Better Buy Than British American Tobacco plc Or Diageo plc?

Global tobacco giant Imperial Tobacco (LSE: IMT) released its results for the nine months ended 30 June 2015 today, and according to the figures, the company is on track to meet full-year targets. 

Tobacco revenue for the period declined 4% as foreign currency movements weighed on sales. However, on a constant currency basis, a calculation that neutralises the effect of negative exchange rate movements, Imperial’s revenue increased by 2% for the nine months to 30 June. Over the past six months, Imperial’s tobacco sales increased 3% on a constant currency basis.

Still, Tobacco volumes for the reported period declined 3%. However, Imperial’s growth brands reported a 15% increase in volume sold during the period. 

Impressive figures

Imperial’s figures for the first nine months of the year highlight the company’s strengths. Indeed, the company is growing in all key areas. Its market share expanded 1% during the period, the sales of growth and specialist brands are rising, the group’s operating profit margin is increasing and cash conversion (the percentage of net profit converted into cash) is expected to be 90% for full-year 2015. 

What’s more, Imperial is committed to rewarding its shareholders. Management is planning a 10% dividend hike this year, which will be Imperial’s sixth consecutive 10% annual dividend hike. During the past five years, Imperial’s dividend payout has increased by 70%.

Surpassing peers 

British American Tobacco (LSE: BATS) and Diageo (LSE: DGE) could be described as Imperial’s closest peers. Together, British American and Imperial make up the whole of the FTSE 100’s tobacco sector while Diageo’s similarities lie in the nature of its product offering. 

Specifically, Diageo can be described as being a ‘vice’ stock, due to its connection with alcohol. Tobacco companies such as British American and Imperial are also known as vice stocks.

So, how do these vice companies compare? Well, on the face of it Imperial has produced the best returns for shareholders over the past five years. The company’s shares have produced a total return (including dividends) of 15.4% per annum since 2010. British American’s shares have returned 14.4% per annum, and Diageo has produced a total return of 13.2% per annum for investors. 

But even after putting in an impressive performance during the past five years, Imperial still looks to be undervalued compared to its two vice sector peers. 

For example, at present Imperial currently trades at a forward P/E of 15.7 and supports a dividend yield of 4.3%. The company’s earnings per share are expected to expand 2% this year and a further 12% during 2016. Analysts are forecasting yet another 10% dividend hike next year. 

On the other hand, British American and Diageo currently trade at forward P/Es of 17.8 and 19.7 respectively. British American’s earnings are not expected to expand this year. City analysts expect Diageo’s earnings to tick higher by 3% during 2016. Diageo and British American’s shares currently offer dividend yields of 3.3% and 4.2% respectively. 

The bottom line

So overall, based on Imperial’s valuation, the company’s steady earnings growth, and dividend expansion, the company looks to be the best of the vice stocks.