Imperial Tobacco Group PLC vs British American Tobacco plc: Which Stock Is The Better Buy?

Imperial Tobacco Group PLC (LON:IMT) is playing catch-up with British American Tobacco plc (LON:BATS), but could be a canny buy, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Few stocks have delivered a more reliable combination of income and capital growth over the last decade than FTSE 100 giants Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) and British American Tobacco (LSE: BATS) (NYSEMKT: BTI.US).

BAT has delivered an average annual total return (share price gains plus dividends) of almost 17% over the last ten years, while Imperial has managed 12% per year.

The FTSE 100 has managed just 6.9%.

Should you invest £1,000 in British American Tobacco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if British American Tobacco made the list?

See the 6 stocks

The perfect stock?

Warren Buffett once said that he liked tobacco stocks because:

“It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

This description of Big Tobacco remains true today — and it pretty much describes the ideal investment, ethical considerations aside.

Here in the UK, there are only really two choices — Imperial or British American — so I’ve taken a look to see which looks most attractive in today’s market.

Back to basics

Let’s start with some simple fundamentals: which stock looks cheaper, based on forecast earnings and yield?

Ratio British American  Imperial 
2015 forecast P/E 16.8 14.6
2015 prospective yield 4.2% 4.6%

Both companies have forecast P/E ratios slightly ahead of the FTSE 100 average, but both also offer significantly higher yields than the FTSE.

What’s more, both companies boast incredible earnings and dividend growth records:

  British American  Imperial 
10 yr. average earnings per share growth 10.9% 6.1%
10 yr. average dividend growth 13% 8.6%

Based on these numbers, British American Tobacco looks a more attractive buy — both earnings per share and the dividend have grown faster than at Imperial.

The price of growth

However, BAT’s extra growth comes at a price. We’ve already seen that the firm’s shares trade on a higher forecast P/E than those of Imperial.

As it turns out, BAT shares trade at a much higher value relative to average historical earnings, too:

Company Price/10-year average
earnings (PE10)
British American  25.2
Imperial  18.8

To be fair, one reason BAT’s PE10 is so much higher is because its earnings have grown so relentlessly, rising every year for at least a decade.

At Imperial, earnings haven’t grown quite so consistently, and nor has the share price.

Which stock would I buy?

Imperial updated the market with a solid trading statement this week, and I think it’s fair to say that the firm has started to address its underperformance relative to British American over the last couple of years.

Although BAT has outperformed its smaller peer in the past, in today’s market I’d be tempted to choose Imperial’s higher yield, lower valuation and stronger earnings growth prospects.

The best income choice

Before you hit the buy button on either stock, however, I would urge you to take a closer look at each firm’s dividend, to ensure there are no hidden warning flags.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »