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Stock of the week: Imperial Brands

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Ian Forrest, investment research analyst at The Share Centre, picks Imperial Brands, formally known as Imperial Tobacco, as stock of the week.

Tobacco stocks in general are considered defensive compared to other sectors because sales are more consistent and generate a lot of cash for companies. In a market that is turbulent and volatile, investors will be seeking companies that will supply them with a relatively reliable return. Despite shares in Imperial Brands easing back by around 5% this week, the company reported a solid trading update at the end of September, in which it stated that it was on track to meet full year expectations with earnings forecast to benefit from currency translation by 4-5%. This therefore makes it a solid candidate for share of the week this week.

For those unfamiliar with the company, Imperial Brands manufactures, markets, and sells a range of cigarettes, e-cigarettes, tobaccos, rolling papers and cigars in 160 countries. Its brands include Davidoff, Gauloises, Gitanes and Golden Virginia. The group has a very impressive record of raising its dividend by an average of 10% for at least the last ten years, and growth is forecast to be well above inflation for at least the next three years.

Investors should appreciate that the shares have risen sharply since the EU referendum in the UK thanks to the weak pound and defensive attractions noted previously. They now trade on a 2017 PE of 14.3, 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 4.3% is also better than BAT.

We recommend Imperial Brands as a ‘buy’ 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.

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