Investors still addicted to risking funds with cigarette makers
Thursday October 01 2009
BARACK Obama, Claudia Schiffer, and Brian Cowen don't have much in common at first sight but they share a passion for smoking -- a passion which remains common in the West, and is growing in the developing world despite the half-hearted attempts by health authorities to discourage the habit.
Tobacco has always made a lot of money for those who sell it and was a mainstay of the world economy for centuries.
These days it remains popular with income-seeking investors despite recessions and health campaigns.
Imperial Tobacco, Europe's second-largest tobacco company, reminded markets recently about tobacco's resilience when it issued a full-year trading statement that hinted strongly that it would once against raise its dividend so that it yields around 4.2pc.
Dividends
Imperial's goal, which it usually meets, is to give shareholders a tempting 50pc of profit in dividends.
A decision on this year's final dividend will be made by the board next month but the company, the Bristol-based maker of Lambert & Butler, John Player Special, and Gauloises cigarettes has recently benefited from a shift by consumers toward cheaper brands.
Imperial gets almost half of its volumes from low-priced products, which is significantly more than rivals such as Philip Morris.
Imperial's Ducados Rubio cigarettes in Spain sell for €2.45 a pack for example, or 24pc less than the price of Philip Morris's Marlboro Gold.
Despite Imperial's generous dividend, the company is also taking steps to pay off debts associated with the purchase of Spanish cigarette company Altadis last year and successfully sold £2bn (€2.2bn) bonds to restructure its debt while also making comforting noises about cash flow.
Imperial also guided investors that overall performance for the year to September would be in line with expectations.
Market
The market is targeting £2.2bn pre-tax profits generated from £7.7bn net tobacco revenues (which excludes the tax the company collects on behalf of governments).
With a high dividend, low debts, and a seemingly endless supply of smokers around the world who are prepared to continue smoking despite the recession and health warnings it is hardly a surprise that Imperial is regularly named as one of the most popular stocks in the world with analysts, according to figures compiled by Bloomberg.
While analysts like the sector, they disagree on whether Imperial or British American Tobacco is a better play. One of the many who favours Imperial is Elaine Coverley, an analyst at Brewin Dolphin, who says Imperial has more synergy savings and opportunities to cut costs -- which she says will come through at a later point.
Coverley has, however, downgraded the tobacco sector as she is not expecting outperformance from defensives in the foreseeable future.
- Thomas Molloy
Irish Independent
