There’s not many stocks out there that can lay claim to satisfying both income and growth investors, but I believe FTSE 100 giant Imperial Brands (LSE: IMB) may fit the bill. The Bristol-based business is the world’s fourth largest tobacco company and offers income investors a 4.9% yield and growth investors solid earnings increases through enviable pricing power and cost-cutting.
Now, it needs to be said that the company is facing down a steady and probably irreversible decline in the volume of tobacco products it sells globally. Although some emerging markets are smoking more and alternative nicotine delivery products such as ‘vaping’ are increasingly popular, volumes are inextricably falling in major markets and caused Imperial’s volumes shipped in H1 2017 to fall 5.7% year-on-year (y/y).
However, this doesn’t mean the company isn’t growing earnings. In the same period adjusted earnings per share rose 6.3% y/y to 121.9p thanks to the weak pound, an ambitious cost-cutting drive and focus on maximising margins and cash flow in key markets like the US, where margins rose 4.2% y/y in the half.
Rising earnings are critical to supporting the company’s policy to increase dividend payments by 10% annually. Interim dividends rose by the target amount this year to 51.7p and mean the company is on track to meet expectations of a full-year payout of around 171p.
For this policy to be sustainable over the long term the company will need to continue finding success in its plan to rationalise the number of brands it sells, invest wisely in growing these core offerings, and renew focus on more profitable markets to increase cash flow and reduce the £13.9bn pile of net debt on the books. There’s no guarantee this plan will work but with its shares priced at just 12.2 times forward earnings while offering a very nice dividend there’s a large margin of safety for investors interested in Imperial Brands.
Off to the races
Another stock that’s traditionally appealed to both income and growth investors is £400m market cap camera accessory maker Vitec (LSE: VTC). After rising over 65% in value over the past year the company’s stock now only yields 2.8% but with earnings rising rapidly there’s plenty of reason to expect dividends to continue growing for some time to come.
By designing, manufacturing and distributing products such as camera mounts, lighting solutions and lenses, Vitec’s premium brands are benefitting from the global boom in content creation by providing the accessories necessary for high quality filming and photography. Overall market growth, together with a concerted push into Asia, is paying off big time for the business as continuing sales in H1 rose 14.5% y/y to £164.9m, while operating profits jumped up from £13.1m to £18.3m.
Management is also whittling down the brands its owns to focus on its core photography and broadcast markets that offer higher margins and are growing more quickly. Increased profits from these core divisions and the proceeds of disposals led to statutory earnings per share rising from 17.1p to 32p y/y, which provided the basis for increasing interim dividends by 5.1% to 10.4p. The company’s dividend yield isn’t amazing right now but with sales and earnings rising rapidly, low debt and an attractive valuation of 14.6 times forward earnings I see plenty of reason to like Vitec.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.