As someone who favours long term growth and rising dividends over shorter term investments focused on capital growth, it is of little surprise that Imperial Tobacco Group PLC (LON: IMT) (LSE: IMT.L) is one of my largest shareholdings. After all, the tobacco industry has a history of providing slow but steady rises in profitability, dividends and share prices. For me, that’s an opportunity that is too good to miss.
For example, over the last five years Imperial Tobacco has increased its earnings in four of those years and has averaged an annual net profit growth rate of 3.5%. That may not sound like such a fantastic rate of growth but when you consider that many companies struggled to post any kind of growth during the challenging early part of that period, Imperial Tobacco’s resilience starts to become clear.
During that five year period, Imperial Tobacco has also increased dividends by 67% and this works out as an annualised rise in payouts to the company’s investors of 10.8%. That’s not bad when you consider that interest rates have been 0.5% for the whole of that period. In fact, total dividends paid during those five years amount to £6.41 which, as a percentage of Imperial Tobacco’s share price from five years ago, equates to a total income of 38% in just five years.
Add to this return the capital gains of the last five years which amount to 105% and it’s clear that Imperial Tobacco has been a superb investment. And while there are always fears surrounding the wider tobacco market and its long term potential, I’m optimistic about the prospects for the sector.
A key reason for this is the increasing use of e-cigarettes. They have become a $billion industry in a very short space of time and are popular among a range of individuals: from younger people through to smokers of cigarettes who are trying to quit. With Imperial Tobacco having purchased the blu cigarette brand which is a major player in the US market and it also having the Puritane brand, it seems to be well-positioned to capitalise on this new growth space.
I think that these products could give Imperial Tobacco’s growth prospects a boost in future years. I also think the company’s share price is likely to respond positively to further dividend growth, since Imperial Tobacco continues to have considerable headroom when it comes to rewarding its investors via dividends.
For example, last year dividends were covered 1.5 times by net profit and for a company with such stable financial performance, this figure could drop. In other words, Imperial Tobacco could continue to increase dividends at a faster pace than profit growth over the coming years.
Allied to this profit growth potential via e-cigarettes and the scope for higher dividends is a yield of 4.2%. In a world where a number of resources companies have sky-high yields, 4.2% may not sound all that impressive. But with a reliable track record of increasing dividends, a stable business model and dividend growth potential, Imperial Tobacco is a company that I’m very happy to call one of my largest holdings.
The author owns shares in Imperial Tobacco at the time of writing.