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Light Up Your Portfolio With This Tobacco Stock

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Imperial Tobacco, one of the world’s leading tobacco companies, offers significant growth prospects, as well as being one of the most defensive areas in consumer staples, Olivier de La Ferrière, fund manager at KBL Richelieu Gestion, told

The valuation of Imperial Tobacco , the owner of brands such as Gauloises, Drum, or Davidoff, is trading at discounted levels due to its lack of exposure to emerging markets, de La Ferrière explained.

While 51 percent of competitor British American Tobacco’s net profit comes from emerging markets and 44 percent for peer Philip Morris , emerging markers contributed just 23 percent to Imperial Tobacco's profit in 2011.

“This is what justifies the valuation discount, but it is simplistic, because (Imperial Tobacco) is the leader in the roll-your-own segment, which is interesting due to its strong growth and higher margins than the rest of the sector,” de La Ferrière said.

The company is a strong cash flow generator which offers a potential increase in shareholder return.

The free cash flow payout ratio — the annual dividend per share divided by free cash flow per share — is currently at 75 percent, but could eventually reach 100 percent, de La Ferrière said, thanks to solid dividendsand an increase in its buyback program.

“A positioning makes sense,” de La Ferrière said, as the stock currently trades below 2,400 British pence and could, in the medium term, go up 20 percent and reach a price target of 2,900 pence.

In the long term, the company could even be an acquisition target, de La Ferrière said, mentioning Imperial Tobacco’s competitors Japan Tobacco and BAT as potential suitors. However, such a move could cause antitrust concerns in Europe, he said.

—By Guillaume Desjardins, Assistant Editor,

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Olivier de La Ferriere does not personally have any position on Imperial Tobacco, British American Tobacco, nor Philip Morris. KBL Richelieu Gestion holds a position in Imperial Tobacco in one of its funds, but not in British American Tobacco or Philip Morris.