Investors looking for defensive stocks in potentially volatile times could do much worse than consider Imperial Tobacco (IMT), says the Investors Chronicle.
In the face of steep rises in duty, public smoking bans and civil actions for damages, Imperial continues to deliver robust performance making pre-tax profits of £1.25bn in the year to September, double the profits of four years ago. In fact, the world's fourth-largest tobacco company (brands include John Player, Embassy and Davidoff) is now worth £12.3bn around 20% more than it was this time last year.
Until the last decade, Imperial was restricted to trading in the UK under a century-old agreement with BAT. But since the fall of Communism, Imperial has successfully entered the more lightly regulated and expanding markets of the ex-Communist economies such as Poland, Russia, and also China, says Tony Jackson in The Sunday Telegraph.
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And as Western governments embraced privatisation, state-owned tobacco monopolies were free to merge and be acquired. Imperial has taken advantage of these opportunities, spending £4.8bn on acquisitions since 1997.
The UK now only accounts for one quarter of the group's profit, compared with 80% ten years ago. But even in the UK, revenues are up by 30%, due to cost cutting and rationalisation on a 45% market share. And Imperial has no sales in the US, the home of class action.
Investors Chronicle agrees that the stock is a "class act" and a long-term buy, trading on 13 times forecast earnings. This is a financially healthy group whose profits were enough to meet interest payments on its debt of £3.28bn seven times over this year. The firm intends to buy back further shares and also has its eyes on potential takeovers.
Tipped at 1,679p, the stock may not be the cheapest, but it has a decent and safe yield of 3.4% and is an understandable business with a steady outlook on a three to five-year basis, says Jackson. The stock's resilience in the market panic of early 2003 is something to bear in mind if you're nervous about the market.
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