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Tempus: smoke signals and rich dividend

 
 

Imperial Tobacco

Revenue £26.6bn Dividend 128.1p

When you are in a consumer market in long-term decline, there are a number of strategies you can adopt. You can try to shift consumers to a smaller number of brands, on which you get more bang for your marketing spend. You can run the business as efficiently as possible, using the cashflow to fund generous dividend payments, which will keep the activist investors from your door. And you can attempt to buy market share, when it becomes available.

Imperial Tobacco is doing all of these. The figures for the year to the end of September outline a 4 per cent decline in the number of cigarettes and equivalents sold, if you disregard the effects of deliberate destocking that takes product out of the market, leading to greater efficiencies and making it easier to switch consumers into preferred brands. It is hard to work out how much of this decline is down to people smoking less — not much, probably. It is more down to the growing trade in illicit fags, as even emerging markets start to put up duty.

Imps is focusing, like the rival British American Tobacco, on core “growth brands”, where marketing is concentrated. It is more than £60 million into a £300 million cost-saving programme, scheduled to complete by 2018.

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So while annual revenues were off by 6 per cent, the effects of the above meant that operating profits were 5 per cent higher at £2,064 million. This allows a 10 per cent rise in the dividend to 128.1p.

A similar rise can be expected in 2018, despite the costs of grabbing market share. Some time in the spring Imps will buy a rack of brands, such as Winston, Maverick and Salem, in the United States, after the merger between Reynolds American and Lorillard shakes these loose.

This will cost $7.1 billion and mean that about a quarter of Imps’ business will be in the US. It will have to be paid for by debt, but the strong cashflow will support that dividend.

That cashflow also meant, along with the flotation of a stake in the non-core logistics operation Logista, that debt is down by £1 billion to £8.1 billion. That dividend is secured, along with the 4.6 per cent yield on the shares, up 110p at £27.77, which is the main reason to hold them.

My advice Hold
Why Tobacco companies are among the best dividend payers in the market, assuming that agrees with your investment principles

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Jardine Lloyd Thompson

Cost of new American unit £50m

Blame the markets we are in, but shares in Jardine Lloyd Thompson fell 56p to 884p on the back of some well-flagged suggestions that rates in the insurance market are experiencing downward pressure and that business remains challenging.

As I have written before, investors such as pension funds have latched on to insurance as an asset classs where returns typically are better than in, say, bonds. This has pushed capital into the market and brought down rates. As a broker, JLT should be less affected than some. Another perceived negative, though, was actually some good news. In August the company, which specialises in big infrastructure and energy projects, spotted an opportunity in the United States, where this market is well developed. The start-up is running ahead of time, 50 staff are already on board and $10 million of costs will be imported into this financial year.

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JLT has never been one of the highest dividend payers in the sector, preferring to focus on growth from projects such as that in America. The shares yield a little more than 3 per cent and sell on 18 times earnings, which does not suggest any pressing reason to buy.

My advice Hold
Why Shares are still on a relatively high rating

Legal & General

Value of annuity assets £39.9m

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We are nearly eight months from a rules-busting budget and almost everyone seems to think that they are a winner. Legal & General certainly seems to be doing well enough. Its third-quarter trading statement showed progress on almost every front, but its annuities business is forging ahead.

The number of individuals buying such, which they are no longer compelled to do, is off by 53 per cent. L&G, though, also sells bulk anuities. These are bought by companies that want to satisfy the pension needs of their workforces without undue risk. L&G reckons that it can double the amount of annuities it can sell, to about £8 billion this year, despite the fall-off in individual business.

Its other growing area, corporate pensions, now has a book worth £10 billion, which means it is at or approaching profitability. Its UK insurance business, covering serious illness and death, now has a seemingly unassailable market share.

The investment management side, the biggest investor in the stock market, is succeeding in spreading beyond Britain, international assets almost doubling in the first nine months, after winning new mandates in the United States and China. Cashflow was significantly ahead of market expectations, up 12 per cent to £827 million over the nine months.

This is significant for investors, because L&G has increased dividends by 25 per cent over the past five years, admittedly from a low base, and analysts expect another 18 per cent this year. This puts the shares, up 4½p at 235¼p, on a 4.7 per cent yield, a good enough reason to hold.

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My advice Hold
Why Growth prospects are there; dividend yield is good

And finally . . .

Farewell, then, tiny Lorien. This is a specialist supplier of IT staff that has been around, in one way or another, since 1977. Taken private in 2007, it is being bought for £43.8 million, or up to £63.7 million if you include earn-outs. The buyer is the AIM-quoted Impellum Group, which claims now to be Britain’s second-largest staffing business by turnover, with a market cap of about £220 million. Impellum also marks the final resting place of Blue Arrow, subject of one of the worst corporate scandals of the 1980s.

Follow me on Twitter for updates @MartinWaller10

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