Imperial Tobacco is the epitome of a defensive company. It generates a steady flow of cash from millions of loyal customers who spend small amounts of their income on the company’s products every day, regardless of the state of the economic.

The result for shareholders has been steady and progressive but also relatively rapid dividend growth over long periods of time. When Imperial Tobacco was added to theUKVI model portfolio back in early 2013 I hoped that we would see more of the same and, in the end, that’s exactly what happened.

Purchase price

2,355p on 08/03/2013

Sale price

2,896p on 04/12/2014

Holding period

1 Year 9 months

Capital gain (net of fees)

21.3%

Dividend income

6.5%

Annualised return

15.6%

However, after a recent run up in price it is now one of the lowest ranked stocks in the portfolio, so I have decided to sell and lock in those capital gains.

Imperial Tobacco share price performance 2014 12

As investments go it was relatively quiet, as the chart above shows. There was no drama and the company simply did what it said it would do, which was to raise the dividend by at least 10% a year. Eventually, as is often the case, the share price responded accordingly.

If the share price drops again I would not be in the least bit surprised to see this company back in the portfolio for a second time.

The decision to buy

As usual the main reason Imperial Tobacco made it into the model portfolio was its high rank on the UKVI stock screen. Back in March 2013 the company was in position 16 out of 162 companies, with the following features:

  • Growth Rate of 13% (10 year average growth of revenues, earnings and dividends)
  • Growth Quality score of 93% (consistency of revenue, earnings and dividend growth over 10 years)
  • Dividend yield of 4.4% and
  • PE10 ratio of 18.9 (share price to 10 year average earnings)

Adding the Growth Rate to the dividend yield as an estimate of possible future annual returns gave a figure of 17.4%, which of course would be more than satisfactory if it could be achieved. In the end, despite being a very high target, that’ wasn’t far off what the investment actually returned.

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