Global tobacco giantImperial Tobacco(LSE: IMT) released its results for the nine months ended 30 June 2015 today, and according to the figures, the company is on track to meet full-year targets.
Tobacco revenue for the period declined 4% asforeign currency movements weighed on sales. However, on a constant currency basis, a calculation that neutralises the effect of negative exchange rate movements, Imperials revenue increased by 2% for the nine months to 30 June. Over the past six months, Imperials tobacco sales increased 3% on a constant currency basis.
Still, Tobacco volumes for the reported period declined 3%. However, Imperials growth brands reported a 15% increase in volume sold during the period.
Impressive figures
Imperials figures for the first nine months of the year highlight the companys strengths. Indeed, the company is growing in all key areas. Its market share expanded 1% during the period, the sales of growth and specialist brands are rising, the groups operating profit margin is increasing and cash conversion (the percentage of net profit converted into cash) is expected to be 90% for full-year 2015.
Whats more, Imperial is committed to rewarding its shareholders. Management is planning a 10% dividend hike this year, which will be Imperials sixth consecutive 10% annual dividend hike. During the past five years, Imperials dividend payout has increased by 70%.
Surpassing peers
British American Tobacco(LSE: BATS) andDiageo(LSE: DGE) could be described as Imperials closest peers.Together, British American and Imperial make up the whole of the FTSE 100s tobacco sector while Diageos similarities lie in the nature of its product offering.
Specifically, Diageo can be described as being a vice stock, due to its connection with alcohol. Tobacco companies such as British American and Imperialare also known as vice stocks.
So, how do these vice companies compare? Well, on the face of it Imperial has produced the best returns for shareholders over the past five years. The companys shares have produced a total return (including dividends) of 15.4% per annum since 2010. British Americans shares have returned 14.4% per annum, and Diageo has produced a total return of 13.2% per annum for investors.
But even after putting in an impressive performance during the past five years, Imperialstill looks to be undervalued compared to its two vice sector peers.
For example, at present Imperial currently trades at a forward P/E of 15.7 and supports a dividend yield of 4.3%. The companys earnings per share are expected to expand 2% this year and a further 12% during 2016. Analysts are forecasting yet another 10% dividend hike next year.
On the other hand, British American and Diageo currently trade at forward P/Es of 17.8 and 19.7 respectively. British Americans earnings are not expected to expand this year. City analysts expect Diageos earnings to tick higher by 3% during 2016. Diageo and British Americans shares currently offer dividend yields of 3.3% and 4.2% respectively.
The bottom line
So overall, based on Imperials valuation, the companys steady earningsgrowth, and dividend expansion, the company looks to be the best of the vice stocks.
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Rupert Hargreaves owns shares of Imperial Tobacco Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.