Shares in companies that can increase their dividends over time can be great sources of passive income. Especially when they trade at unusually cheap prices.
That’s the case with Associated British Foods (LSE:ABF) – the stock’s at a 52-week low, the dividend yield’s at a 10-year high, and the growth’s been impressively consistent. So should investors consider it?
The business(es)
Depending on how you look at it, Associated British Foods is either an impressively diversified firm – or a mix of businesses that don’t really make much sense together. It might be a bit of both.
The company has five divisions. These include sugar, agricultural feeds, and branded groceries, but the largest of these by some margin is Retail – which is value fashion and lifestyle group Primark.
From an investment perspective, I’m much more positive about Primark than I am about any of the firm’s other units. I think the retail operation is where growth’s likely to come from.
My view with Associated British Foods is that investors should consider it when Primark by itself is worth the share price. And with the stock at a 52-week low, that time might be now.
Valuation
ABF currently has a market-cap of £13.7bn. On top of this, it has about £2bn more in net debt for investors thinking of buying the stock to consider in their calculations.
Primark however, generated £1.1bn in operating income in 2024. This is just over half the company’s earnings and it might be enough to justify the entire market-cap by itself.
Based on this, the stock trades at an approximate price-to-earnings (P/E) multiple of 14 – including the firm’s debt. I don’t think that’s a lot for a business (Primark) with strong long-term prospects.
The retailer has a business model based on stores rather than e-commerce. This helps reduce the costs of online returns, which I see as a big advantage, but there are some risks to consider.
Risks
Primark’s latest results have been disappointing – and they demonstrate some of the challenges the business faces. Overall sales grew just 2% during the 16 weeks leading to 4 January. This was largely due to a challenging trading environment in the UK and Ireland, which accounts for around 45% of sales. Like-for-like sales fell 6% and the retailer also lost market share.
That tells investors that growth is in no way guaranteed. But things were much more positive elsewhere – revenues grew 17% in the US and Primark still only has 29 stores across the Atlantic.
I think that means there’s a lot of scope for expansion. And I expect this to provide a big boost to profits at Associated British Foods as a whole, especially when the short-term issues subside.
A buying opportunity?
For me, the investment case here is all about Primark. And despite the short-term challenges, I see a margin of safety in the current share price.
I therefore think investors should consider the stock with its potential for both growth and passive income. Despite the challenges, I don’t see that the opportunity has ever been better.
