The dividend yield on Associated British Foods‘ (LSE:ABF) shares is decent rather than spectacular, at around 3%. But I believe it’s still one of the FTSE 100‘s most attractive dividend stocks to consider today.
Excluding 2020, the clothes retailer and food supplier has grown annual payouts in nine of the last 10 years alone. And dividends have risen strongly since it suspended dividends during the Covid-19 pandemic.
For the last financial year (ended September), ABF increased the ordinary dividend 33% to 63p per share. It also forked out a 27p per share special dividend.
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City analysts expect this impressive record of dividend rises to continue over the next three years at least, albeit at a lower rate.
| Financial year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 68.55p | 9% | 3.1% |
| 2026 | 73.40p | 7% | 3.3% |
| 2027 | 76.20p | 4% | 3.4% |
Of course, past performance is no guarantee of future returns. So I need to consider carefully how realistic these projections are.
On top of this, I need to consider the potential for further share price weakness that may offset any growing dividends. ABF shares have fallen 5.5% in value over the past year.
Here’s my verdict.
Looking good
The first thing to look at is how well predicted dividends are covered by expected earnings. I’m searching for a reading of 2 times and above.
Pleasingly, Associated British Foods scores high here. For the three years to fiscal 2027, dividend cover’s between 2.8 times and 2.9 times. This provides a decent margin of safety in case profits disappoint.
In other good news, ABF’s strong balance sheet gives it added flexibility to keep growing dividends at a rapid pace. Its net debt to adjusted EBITDA ratio was just 0.7 as of September, comfortably within its target of “well under 1.5 times“.
Encouragingly, ABF says that “surplus capital may be returned to shareholders by special dividends or share buybacks” if the ratio sits below 1. It’s a pledge the company continues to make good on.
As well as paying that special dividend for last year, the firm announced a further share buyback programme. It plans to repurchase £500m of its shares up until next September.
A top FTSE stock
Things are looking bright for ABF investors chasing dividends then. But as I say, share pickers need to also consider the possibility of further price weakness that could damage returns.
Fierce competition at Primark is just one threat to the company’s market value. Other risks include rising costs, and particularly massive expenses related to its global expansion strategy.
However, I’m expecting ABF’s share price to recover robustly over time. I’m most excited by the outlook for Primark as demand for value clothing soars the world over.
And so far, the company’s store rollout programme is effectively capitalising on this opportunity. New stores in its US and European markets drove sales 6% higher in fiscal 2024.
The business also offers diversification through its robust food and ingredients divisions. On balance, I think it’s a top income stock to consider.
