Stock of the Week: Imperial Brands
With questions being raised about how long stock markets can sustain their current high level – and signs that ‘Trump Trade’ might be coming to an end – now might be the time for investors to consider more defensive stocks. Tobacco companies, such as Imperial Brands, fall into this category because demand for their products does not vary significantly depending on the health of the economy. They generate a large amount of cash from their operations which usually enables them to pay good dividends. Consolidation in the sector has been a notable feature in recent years as growth has been harder to find and the focus has switched to cutting costs.
Interim results published by Imperial Brands this month showed a 12% rise in revenue to £14.3bn and adjusted operating profit rose 6.3% to £1.7bn. Sales of cigarettes dropped 6% but the company raised its forecast for cost savings for the full year. The dividend was lifted 10%.
The shares trade on a 2018 PE of 12.8, which is below that of main peer British American Tobacco. The price to book ratio of 6.3 times is well below average and the prospective dividend yield of 5.1% is also better than BAT.
We are maintaining our ‘Buy’ recommendation for medium risk income-seeking investors due to the very healthy dividend, excellent track record of dividend growth, the growing success of alternative products such as e-cigarettes and the possible revenue boost from improving US-Cuba trade relations.