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Friday, February 24, 2012

imperial tobacco shares forecast 2012 - 2013

imperial tobacco shares forecast 2012 - 2013 : A few weeks ago, Citigroup said it believed that smoking could “virtually disappear” in Britain by 2050. Results from Imperial Tobacco yesterday, however, showed there’s still life in the sector yet. Questor says buy.

In a surprise move, Imperial Tobacco upgraded its dividend policy yesterday, making the shares even more attractive for income seekers. Sales growth came in ahead of expectations, too.

To be fair to Citi’s analysts, they did stress that these were “extremely long-term” trends and did not justify any action as yet. The broker said that pricing increases will continue to drive profit growth for tobacco companies until about 2020.

As a result of Citi’s comments – and the unfashionable nature of an investment in tobacco companies – the shares have been underperforming of late. This dividend move can be read as a positive sign of management’s confidence in future prospects so it is likely to reverse that trend. The shares are now at a good level for new investors in the company to buy into a growing income stream.

Imperial’s price jumped the most in two years yesterday, with the shares still yielding 5pc even after the rise. The tobacco group will now increase the dividend payout ratio to 50pc of adjusted earnings in the current financial year – up from 47pc last year.

The prospective yield rises to 5.5pc next year and 6.1pc in the year to September 2013, which is very attractive.

In the first three months of the current financial year, the manufacturer of the Lambert & Butler and Davidoff brands said underlying revenues have risen by 5pc, with the total volume of sticks sold up 1.2pc. This is better than analysts had expected and it breaks down as a 0.5pc rise in cigarettes and a 6.3pc rise in rolling tobacco sales.

imperial tobacco stock chart 5 year 2007 - 2012
There was also positive news on the tax rate. Imperial said that following “favourable resolution of a number of outstanding matters with various European tax authorities” its adjusted tax rate for 2011 and subsequent years was expected to be about 24.5pc, compared with previous guidance of about 26pc.

Volumes in the UK and Germany were stable, but new laws in Spain regarding smoking in public places hit January volume there by 10pc. Volumes in the rest of Europe fell 3pc, with the Americas down 4pc. The rest of the world saw volumes grow 4pc, but this is at a lower margin.

Imperial has been servicing a large debt pile since its purchase of Spanish group Altadis in 2007 and the debt stood at £9.3bn at the end of the last financial year. However, the company managed to cut debt by significantly more than expected last year. Debt fell by £1.5bn compared with expectations of £1bn and Imperial has a target of a £1bn cut this year.

The shares are trading on a September 2011 earnings multiple of 9.8 times, falling to 9.1 next year. This is a discount to peer British American Tobacco (BAT), which is trading on a December 2010 multiple of 13.5, falling to 12.3. The discrepancy exists because more analysts are more upbeat on its prospects because they see future more benefits from cost cutting at BAT.

The shares were first recommended as a buy on November 30, 2008, at £16.18 a share. They are now up 18pc compared with a market up 39pc. The shares remain a buy for income seekers, although the sector is obviously not to everyone’s taste.

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