The near and mid-term future is starting to look rosy again for many of our top FTSE 100 companies. But in my perusal of them today, I come to one that I feel less positive about, and that’s Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US).
While the FTSE picked up around 12% over the past 12 months, Imperial Tobacco is down 10% to around 2,260p.
Why? Let’s start with a look at some figures from the past five years, together with the current analysts’ consensus:
| Sep | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2009 | £945m | 161.8p | +18% | 73.0p | 4.0% | 2.2x | |
| 2010 | £2,118m | 178.8p | +10% | 84.3p | +15% | 4.4% | 2.1x |
| 2011 | £2,153m | 188.0p | +5% | 95.1p | +13% | 4.4% | 2.0x |
| 2012 | £1,081m | 201.0p | +7% | 105.6p | +11% | 4.6% | 1.9x |
| 2013 | £1,261m | 210.7p | +5% | 116.4p | +10% | 5.1% | 1.8x |
| 2014* | £2,545m | 213.6p | +1% | 127.0p | +9% | 5.7% | 1.7x |
| 2015* | £2,616m | 224.9p | +5% | 138.9p | +9% | 6.3% | 1.6x |
* forecast
Looking good?
On first glance, things don’t look so bad there. There’s no real earnings growth forecast for the year to September 2014, but it looks like it might start to pick up again in 2015. And though dividend growth is slowing, it’s not by that much and 9% per year is still pretty impressive.
All in all, those headline figures for Imperial Tobacco are similar to those from British American Tobacco, which I looked at earlier this month. But again, we need to look at the bigger picture.
Maybe not
Imperial Tobacco has done a good job of keeping its dividends growing, and the 5.7% forecast for 2014, followed by 6.3% the year after, does look very tempting. But look at the way the dividend cover has been falling year-on-year. Imperial started with better cover than British American, and that’s allowed it to keep those payments going.
However, dividend rises in excess of earnings each year cannot be maintained in the long term, and if the trend we see in the table continues, those rises will at least have to slow.
Gloomy trend
If we take a look at Imperial Tobacco’s last set of full-year figures, for the year ended 30 September 2013, we see much the same picture as we saw at British American.
The company is talking glowingly of “enhanced quality of growth“, stressing its progress in its growth brands and growth markets — and, to be fair, revenue from the firm’s growth brands rose 2%, with growth-market revenue also up 2%.
But actual volumes, in terms of stick-equivalents, fell by 7% from a year previously.
What Imperial is doing, in the exact same way as its competitors, is focusing on boosting its margins from its high-status brands in order to keep profits up. That might work well for a few more years, but in a world in which tobacco consumption is falling, the strategy can surely only help slow the overall decline of the industry.
Still too high
Imperial Tobacco’s shares have fallen in price, and the consensus forecast puts them on a P/E of around 10.5 for 2014, falling to 10 for 2015. In the short term, that looks cheap, especially with those dividends — but with the future of the business looking bleak, I think they’re still too expensive.
Verdict: Further out of favour in 2014!
