2014 has been a great year so far for investors in Associated British Foods (LSE: ABF), with the diversified food and clothing group seeing its share price rise by an impressive 13% since the turn of the year. This easily beats the FTSE 100’s 1% gain over the same time period. Looking ahead, though, ABF may be worth avoiding. Here’s why.
An In-Line Update
ABF’s update this week showed that the company remains on-track to meet its full-year expectations. This is positive news for investors, although sentiment has weakened somewhat due to lower sugar prices having the potential to reduce earnings. Despite this, ABF should benefit from a weaker sterling, while its grocery, clothing and ingredients divisions continue to offer investors a reliable source of growth.
Reliable Earnings
Indeed, ABF is a very reliable stock. It has increased its bottom line in each of the last five years, with it averaging an increase of 12.6% per annum. This is considerably higher than most FTSE 100 companies have managed during the period. Furthermore, ABF is on target to continue with its positive growth rate trend, with net profit set to rise by 4% in each of the next two years.
High Valuation
However, the cost of such reliable growth appears to have become rather excessive. For instance, ABF currently trades on a price to earnings (P/E) ratio of 27, which is almost twice the current 13.8 rating of the FTSE 100. While its earnings profile is super-reliable and, perhaps more importantly, very defensive (discount clothing and food tend to sell well even during recessions), ABF’s current share price appears to include a premium that is simply too high.
A True Defensive Play?
One measure of a stock’s defensive appeal is beta. This shows how closely a company’s share price should (in theory) track the wider index over the medium term. A low beta indicates a stock with strong defensive qualities, since it should fall by a smaller amount than the wider index during a market correction.
However, ABF’s beta of 0.94 does not indicate a particularly defensive play. That’s because, if the FTSE 100 were to fall by 10% for example, ABF would be expected to fall by 9.4%. Although this is 0.6% less than the wider market, it does not exactly scream ‘defensive’. As such, there may be better options available for investors who are concerned about future market uncertainty.
Income Appeal
As well as a high valuation and a high beta, ABF is also worth avoiding as a result of its extremely low yield. With earnings forecast to grow by just 4% in each of the next two years and its rating being so high, investors would normally look to a decent yield to provide a return. However, in ABF’s case its yield is just 1.3%, which makes the stock unappealing from an income investing standpoint.
Looking Ahead
While this week’s update confirmed full-year guidance and ABF does have a reliable history of earnings growth, its shares may be best avoided. With a high valuation, high beta and low yield, ABF may not prove to be a star defensive performer going forward.
