Head To Head: British American Tobacco vs Imperial Tobacco

Published in Investing on 19 September 2012

Which tobacco giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are tobacco groups British American Tobacco (LSE: BATS) and Imperial Tobacco (LSE: IMT).

Fears about the global economy and the sovereign debt crisis in Europe have made defensive companies -- companies that perform reasonably well in all economic conditions -- a popular, and rewarding, choice for investors over the past year or so. However, the market's been in a somewhat more upbeat mood of late and many defensives have come off the boil.

The FTSE 100 has risen 7% over the last three months, comfortably outperforming British American Tobacco (up 2%) and Imperial Tobacco (down 3%).

Let's take our seats at ringside.

Round 1: earnings

Recent share price3,220p2,350p
Last year price-to-earnings (P/E) ratio16.812.8
Current year forecast P/E15.411.8
Four-year average earnings per share (eps) growth (%)1512
Current year forecast eps growth (%)99
Forecast operating margin (%)3731

Sources: Digital Look, Morningstar, company reports. Winners in bold.

The companies are evenly matched in the first round. Imperial scores strongly on historic and forecast P/E and shares a point with BAT on forecast earnings growth, while BAT takes points outright for historic earnings growth and forecast operating margin.

Round 2: dividends

Last year dividend yield (%)3.73.7
Current year forecast dividend yield (%)4.24.5
Four-year average dividend growth (%)1912
Current year forecast dividend growth (%)1520
Forecast dividend cover1.51.9

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Imperial wins the second round quite comfortably, taking the points on all the forecast measures. BAT scores a point for historic dividend growth and shares a point with Imperial on historic yield.

Round 3: balance sheet

Price-to-book (P/B) ratio7.23.0
Net gearing (%)99118

Sources: Digital Look, Morningstar, company reports. Winners in bold.

The points are shared in the final round. It's worth noting that the companies have high gearing compared with the average in many other industries -- not quite as high as utilities, but reflecting the reasonable stability and visibility of earnings in a business dealing in addictive products.

This was a close-fought contest with the companies drawing two rounds and Imperial winning one. However, the victory doesn't look quite so tight on the overall points tally, with Imperial scoring seven points and BAT five.

Post-match assessment

Both companies have delivered historic earnings and dividend growth well ahead of inflation, BAT being particularly strong on these measures. However, Imperial is stronger on forecast growth.

On the question of which firm is the better buy today, it's notable that Imperial scored points on all the valuation ratios -- P/E, dividend yield and P/B -- while BAT could only share a point with Imperial on one of these measures.

BAT has been a great investment for long-term shareholders, but at today's share prices Imperial is on a markedly cheaper P/E. Imperial's forecast 11.8 times earnings doesn't look too high a price to pay, particularly with a prospective yield above the market average at 4.5%.

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> G A Chester owns does not own shares in any of the companies mentioned in this article.

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goodlifer 19 Sep 2012 , 10:52am
snoekie 19 Sep 2012 , 3:33pm

I hold both, albeit inherited, one on the break up of Hanson, and the other from my Father. Both yielding a solid and welcome dividend.

Given the aversion to their product, and the anti legislation, I am considering my options as these will affect the price and dividend, probably in the not too distant future.

Mind you, until now both companies have thrived notwithstanding the adversity and litigation.

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