Imperial Tobacco's Dividend Smokescreen To General Election Fear

With General Election 2015 too close to call the scope for investors to be fearful is clear with the scope for tax and spending policies to impact the broader economy and specific sectors alike.

Uncertainty is a constant in equity investing but there are corporate characteristics to look for to help minimise these. International exposure is one of these and ironically the FTSE-100's big global earners would see overseas profit translation gains back into Sterling terms if the pound fell further against the other major currencies of the world.

Another strategy with defensive attributes in times of uncertainty are dividends. Usefully a company with at face value a high dividend yield and considerable international exposures reported its half year numbers earlier today: Imperial Tobacco (IMT).

Tobacco companies attract a variety of responses but from a purely investment perspective the sector's strong pricing power and highly consolidated, brand loyal status has provided a backdrop to consistent increases in profit and generation of free cashflow.

Imperial Tobacco's results today were completely consistent with this positioning even if (ironically given the above comments) the pound's strength over the past year against the euro and other currencies hurt Sterling denominated returns. Underlying profit growth rates continue to accrue at a mid-to-high single digit rate allowing the company to continue to achieve its stated commitment to a 10% dividend increase.

Each investor will have their own idea about what an attractive dividend yield is but in a world where 10 year UK gilt yields breaking back over the 2% level made headlines earlier today the current Imperial Tobacco dividend yield of just over 6% catches the eye.

The company will face challenges including the introduction of plain packaging legislation in the UK, counterfeit and illegal smuggling operations in certain parts of the world and some uncertainty over the completion of a potentially very exciting expansion deal in the US. However the inherent stability of the company's cash generation, its strong brands, growth focus towards both the US and the emerging markets plus the anticipated continuing dividend progression make it a fairly safe counter beyond pure income holders.

Some people in times of stress reach for cigarette. In a free world that is every adults choice. In my view if you are stressed about an uncertain post General Election world then consider buying Imperial Tobacco shares from both a dividend yield and solid capital gain potential.

Disclosure: I do own Imperial Tobacco shares but have not traded them in the last month.