As economic growth stutters, I’m taking an increasingly defensive stance to capital allocation in the stock market. Following a strong trading update, and a surging share price, Associated British Foods (LSE: ABF) fits this risk profile.
Positive numbers
In its Q4 trading update, ahead of the release of its annual results in November, ABF posted another strong set of results. Little wonder that its share price surged 6% in trading this morning.
In 2023, the share price is up 23%, comfortably beating the lacklustre performance of the FTSE 100. Indeed, over the last 12 months the stock has appreciated 63%.
Against a backdrop of a challenging macro environment, the group managed to increase sales across both its food and retail businesses.
Strong sales growth in its grocery business is being driven by the strength of its international brands such as Twinings, Ovaltine, Blue Dragon and Patak’s. Indeed, it’s the exposure of its brands to the lucrative US market that really sets its apart from other domestically-focused retail-only businesses.
Consumer spending patterns
Over the past 18 months the Bank of England has jacked up interest rates from 0.25% to 5.25%. As a result, consumer spending behaviour is changing.
In 2020 and 2021, lockdowns led to a more exaggerated focus on the discretionary spending side. However, since 2022 it’s has been shifting toward more non-discretionary spend.
The latest trading update from a number of US-listed retailers paints a picture that’s very likely going to repeat itself in the UK.
Discounters including Wal-Mart and TJX posted very strong numbers. However, discretionary retailers such as Macy’s and Dick’s Sporting Goods reported a significant pullback in spending. They’ve also begun seeing an uptick in delinquencies on the credit cards that they issue.
Another emerging issue for retailers, both in the UK and across the pond, is rampant shoplifting. I think that in itself is a sign of a struggling consumer.
Primark has been posting increasingly positive sales throughout 2023. As the consumer becomes increasingly squeezed, I believe that the appeal of its proposition will continue to resonate with individuals.
Inflation-resistant stock?
ABF’s ace in the pack is its diversity. Throughout the ebb and flow of economic cycles, different parts of the business take up the slack when others are struggling. This was particularly notable during lockdown.
We’ve come through a period of above-average inflation and even though that’s easing, it’s still higher than we’d become used to. In this environment, I believe that all parts of the group should perform well
Primark’s share of the UK market increased to 6.4% from 6.2% for the 12 weeks to the 20 August. Its sugar business is expected to make a substantial improvement in profitability in 2024. And its ingredients business is seeing strong demand for its products.
Of course, there are risks. One significant one is the effect of inflation eating into margins in its retail operations. At the end of last year, Primark took the decision not to increase prices. This was in part taken in order to protect its core proposition of affordability and price leadership.
In these uncertain times, I only want to invest in businesses that generate strong cash flows and possess a rock-solid balance sheet. ABF have both. For me, it’s a no-brainer buy.
