The Associated British Foods (LSE:ABF) share price is up a phenomenal 48% over 12 months, despite being down over five years as it recovers from the pandemic.
The company isn’t renowned for its dividends. But after a strong year (its results were published on Tuesday 5 November) during which profits rose by 25%, the London-headquartered firm proposed a final dividend of 33.1p per share and a special dividend of 12.7p.
This takes the full-year payout to 60p, up 37% year on year. With the share price at £22.37 at the time of writing, the dividend payout would represent a 2.7% yield. That’s by no means sizeable, but it’s certainly a positive to see it increase.
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The dividend also complements the company’s impressive share price growth over 12 months.
Earnings in detail
In addition to the dividend raise, the firm committed to another £500m buyback — it had already undertaken a £500m buyback over the past 12 months.
Associated British Foods is able to execute this additional share buyback due to its strong balance sheet and robust cash generation.
Group revenues surged by 16% to reach £19.75bn in the 12 months ending on September 16, primarily driven by pricing actions.
Primark, which generates around half the company’s revenue, saw sales rising by 17% to £9bn. This was partly achieved by passing on only a portion of input cost increases to customers.
Although the adjusted operating margin in the retail sector dropped to 8.2% from 9.8% the previous year, the company expects it to bounce back to above 10%.
This will be aided by anticipated reductions in material and freight costs.
Group pre-tax profit increased by 25% to £1.34bn, while basic earnings per share saw a substantial 51% surge to 134.2p. The board also pointed towards a strong year ahead.
Valuation
The stock rose more than 7% on results day and currently trades at 16.9 times earnings. That’s not particularly cheap and it’s above the FTSE 100 average.
However, companies with greater long-term prospects tend to trade with higher valuations, with investors willing to pay a premium for growth.
Looking ahead, we can see that the consensus is 159.3p for 2024 and 174p for 2025. As such, the company has a forward price-to-earnings of 12.4 times for 2025.
One metric used to established whether a growth stock is undervalued is the price-to-earnings-growth (PEG) ratio. This is normally calculated using a growth rate for five years.
However, using the data available, I’ve come to a PEG ratio of 1.69. It’s often the case that a ratio under one suggests a company is undervalued. Nonetheless, I believe this is still an attractive figure.
Of course, every stock has risks. This one isn’t cheap by several standards, and a severe recession would almost certainly dent growth plans, regardless of Primark’s being firmly in the more affordable end of the market.
Personally, I’m considering buying Associated British Foods shares, but I may wait for a better entry point as the stock has surged in recent weeks.
