Troubled by the potential for market correction? Then consider investing in high quality mega cap Imperial Brands (IMB) which is committed to growing dividends by at least 10% a year. Shares believes the FTSE 100 company is worth buying ahead of first half results (3 May), which should provide reassurance through yet another dependable dividend increase.

Brand power

The tobacco multinational’s resilient earnings and robust cash flows stem from a strong portfolio of brands which confer pricing power upon the business. These include Davidoff, Gauloises Blondes, West and JPS cigarettes, Rizla papers and Cohiba and Montecristo cigars.

Negatives hanging over the global industry include demand, duties and regulation. The decline in tobacco volumes is expected to continue as smoking rates fall across the world, yet global population growth means smoker numbers won’t be much changed by 2025, according to the World Health Organisation.

Guided by CEO Alison Cooper, Imperial continues to bear down on costs and is investing an extra £300m behind its brands and key markets in 2017 to drive medium term sales growth.

Imperial has guided (30 Mar) towards a strong uptick in sales and earnings per share for the half to 31 March despite a deterioration in industry volumes. These results will show a boost as overseas earnings are translated into weak sterling.

Growth puff?

Imperial Brands recently inked (11 Jan) a joint venture to drive the growth of West and Davidoff in China, the world’s biggest tobacco market. This builds on 2015’s acquisition of a number of US cigarette brands, including Winston and Kool and the international rights to the blu e-vapour brand, in a deal which transformed Imperial’s presence in the world’s most profitable tobacco market outside China.

M&A optionality

For the financial year to September 2017, consensus earnings and dividend per share estimates are currently pitched at 272.91p (2016: 249.6p) and 171.1p (2016: 155.2p) respectively, rising to 284.83p of earnings and a 188.28p shareholder reward for 2018. Based on these latter forecasts, Imperial Brands trades on a prospective PE ratio of 13.5 times and offers an attractive 4.9% dividend yield.

We view this as reasonably undemanding for such a high quality stock. The merger between British American Tobacco (BATS) and Reynolds American has reignited speculation about further industry consolidation. Imperial Brands is the outstanding industry bid target, with Japan Tobacco International considered the logical acquirer. (JC)

IMPERIAL BRANDS (IMB)  £38.33

Stop loss: £30.66

Market value: £35.9bn

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