UPDATE 2-Imperial Tobacco sets buyback as troubles fade

Tue May 1, 2012 4:40am EDT

* First-half adjusted earnings 93.1 pence, vs poll 92.7p

* Sets annual share buyback worth 500 million pounds

* Sees recovery in Q2 and momentum building for H2

* Interim dividend up 13 percent at 31.7 pence

* Shares up 2 percent

By David Jones

LONDON, May 1 (Reuters) - Imperial Tobacco, the world's No. 4 cigarette group, set a 500 million pound ($812 million) share buyback and said it saw a return to sales growth as the West and Gauloises cigarette maker put many of its 2011 problems behind it.

The British company, which sells over 340 billion cigarettes annually, reported that half-year earnings beat forecasts as it gained from the ending of a price war in Spain and the unwinding of destocking in the United States and Ukraine.

Chief executive Alison Cooper was upbeat despite two of its biggest markets, Britain and Spain, slipping back into recession as it countered the downturn with a twin strategy of offering cheaper cigarettes and roll-your-own tobacco products and hiking the prices of offerings aimed at more affluent consumers.

"We are a defensive sector and have seen a bit of softness but even in this environment we can do well and have a lot of momentum going in the second half both in the EU and outside the EU," she told a briefing after half-year results on Tuesday.

Cooper said the group offered a range of products from its top brands like Davidoff, Gauloises, West and JPS through to fine tobacco like Gold Leaf and Golden Virginia Yellow to cope with tough economic climates in many of its markets.

Imperial, like bigger rivals Philip Morris, British American Tobacco and Japan Tobacco has in parallel been hiking prices and expanding into emerging markets to offset declining smoking levels in many mature markets.

Imperial shares rose 2 percent to 2,513 pence by 0810 GMT, one of the biggest risers in the FTSE 100 after seeing its shares recover by nearly 20 percent over the last year as sales and cigarette volumes have started to come back.

"The tone from management is upbeat, with sales momentum building into H2 on the back of increased innovation," said analyst Dirk Van Vlaanderen at brokers Jefferies.

The group saw a return to sales growth in the first three months of 2012 with revenues ahead 8 percent, putting its half year to end-March sales rise at 3.3 percent after Spain, the United States, Ukraine and United Nations sanctions on Syria hit revenues in the last three months of 2011.

Its cigarette volumes recovered in its second quarter to be down 1 percent, while the half-year was off 4.1 percent.

The 500 million pound buyback follows a similar-sized scheme last year when it promised dividends would grow faster than earnings to push its payout ratio to shareholders to over 50 percent after paying down debts from its 2008 Altadis buy.

The Bristol-based group, which also makes Lambert & Butler, Embassy and Fortuna cigarettes, reported adjusted earnings rose 5.3 percent to 93.1 pence a share for the half year to end-March, beating a forecast of 92.7 pence from Reuters estimates.

The interim dividend was raised 13 percent to 31.7 pence.

Tobacco groups rich with cash have been paying big dividends and buying back shares, with Imperial paying out 50.6 percent of annual earnings as dividends.

BAT launched a 1.25 billion pound buyback this year and raised its 2011 dividend 11 percent in its aim to pay out 65 percent of earnings as dividends.

Cooper highlighted she remained opposed to proposed legislation which would force manufacturers to sell cigarettes in plain packs with product names in standard typefaces.

She said this was unnecessary, not supported by any evidence it discouraged underage smoking and threatened the group's legal trademarks.

Australia is planning to be the first nation to introduce this plain packaging legislation in December, while Britain has begun a consultation process and the New Zealand cabinet has agreed to impose it subject to a consultation process.