A Closer Look at Imperial Tobacco Group PLC (IMT)’s Dividend Potential

LONDON — Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Imperial Tobacco Group PLC (LON:IMT) and assessing whether the company is an appetizing pick for income investors.

How does Imperial Tobacco Group’s dividend history stack up?

Metric 2009 2010 2011 2012
FY Dividend per Share (pence) 73 84.3 95.1 105.6
DPS Growth 15.7% 15.5% 12.8% 11%
Dividend Cover 2.2 times 2.1 times 2 times 1.9 times

Source: Imperial Tobacco Group company accounts.

Imperial Tobacco Group PLC (LON:IMT) has been a solid deliverer of double-digit dividend growth over the past four years, even though a slowdown in earnings growth has seen dividend expansion follow suit. Still, full-year dividend growth over the past three years has still comfortably outperformed earnings increases.

The firm’s operations in a traditionally defensive sector — historically speaking, global cigarette demand remains strong even in spite of broader economic weakness — provides investors with extra security over future payments. And even though dividend cover has slipped in recent years, last year’s reading was still around the benchmark reading of two times earnings, which generally represents very decent security.

What are Imperial Tobacco Group’s dividends expected to do?

Metric 2013 2014
FY Dividend per Share (pence) 116.1 128.1
DPS Growth 10% 10.3%
Dividend Cover 1.8 times 1.8 times
Dividend Yield 5% 5.5%

Source: Digital Look.

Imperial Tobacco Group PLC (LON:IMT) announced in April’s half-year report that tobacco net revenues fell 2% at constant exchange rates in September-March, to 3.3 billion pounds, which drove group adjusted operating profit 5.1% lower to 1.4 billion pounds. Weakness was attributed mainly to declining product demand in much of Europe.

More encouragingly, however, its key Gauloises Blondes, Davidoff, John Player Special, and West brands saw net revenues and volumes rise 5% and 1%, respectively, during the period, while group sales in the Asia-Pacific region, Africa, and the Middle East also took off. Imperial Tobacco Group PLC (LON:IMT)’s belief in future growth was affirmed by its decision to lift the interim dividend 11% and said that it plans to “grow dividends by at least 10% per year over the medium term.”

City estimates expect moderate earnings growth during the year ending September 2013 and in the following 12 months to present healthy dividend expansion close to 10% during this period.

How does Imperial Tobacco Group’s dividend prospects rate against the competition?

Prospective Dividend Yield Prospective P/E Ratio
Tobacco 4.5% 13.6
FTSE 100 3.2% 15.7

Source: Digital Look.