AB Foods serves up strong first-half results

“The FTSE 100’s advance to new all-time highs (despite what feels like incessantly bearish commentary on companies looking to leave the UK or list elsewhere) is grabbing all of the headlines, but stock markets are really a market of stocks and for indices to rise, share prices must rise. A surge in Associated British Foods’ shares to their highest mark since 2018 may therefore be indicative of a mood shift in London,” says AJ Bell investment director Russ Mould.

“A big jump in first-half profits, a huge hike in the interim dividend and ongoing share buybacks are all helping the share price and management’s outlook statement is suitably confident.

“The 46% increase in the interim dividend to 20.7p a share suggests that analysts’ forecasts of a full-year dividend of 61.6p, some 30% above the amount paid in the year to September 2023, are already looking conservative. 

Source: Company accounts, Marketscreener, consensus analysts' forecasts. Fiscal year to September

“It also speaks of management’s confidence in the outlook, which may be reaffirmed by the ongoing share buyback scheme, the second such £500 million programme. This will roughly double the total cash returns for shareholders from the company in the year to September 2024, using that 61.6p-a-share analysts’ consensus forecast for the dividend, as that equates to £455 million on the current share count.

Source: Company accounts, Marketscreener, consensus analysts' forecasts. Fiscal year to September. *Includes special dividends

“The higher dividend and buyback also flag one of the UK equity market’s wider attractions.

“The forecast dividend yield from the FTSE 100 for 2024, based on aggregate analysts’ consensus forecasts, is just under 4%. Buybacks added another 2.5% to the pot in 2023 and takeovers delivered another 1.5% to 2.0% last year. If 2024 sees a repeat of the buyback and takeover activity – and the first quarter of the year has seen a strong start on both fronts – then the actual cash yield from the FTSE 100 could easily be in the range of 7% to 8%, a figure that beats cash in the bank, UK government bond yields and inflation.

“The figure is so high because sentiment toward the UK is so downbeat, either for reasons of economics, politics or that run of firms who are looking to leave London and list elsewhere (or float on a different stock exchange). As a result, investors are demanding a high yield, or cash return, to compensate themselves for the perceived risks.

“But if investors become more comfortable with UK equities as an asset class, and feel there is less risk involved, they may demand less compensation and be prepared to accept a lower yield (by paying a higher price, or valuation).

“It is early days, and the UK still has a lot of underperformance to catch up, especially relative to the USA. But more confident outlook statements from firms such as Associated British Foods can only help, even if the company is not one of the FTSE 100’s biggest members, ranking thirty-third biggest by forecast profits and thirty-fifth biggest by forecast dividends in 2024, based on analysts’ consensus estimates.

“Perhaps the biggest news from the AB Foods interim report was the sharp recovery in profit margins at Primark. The fast-fashion retailer seems to be finally catching a break from the relentless rise in raw material and shipping costs and using selective price increases and higher volumes to compensate. 

“Total sales rose 7.5%, helped by floor space expansion in Europe and the US in particular and click and collect in the UK, and like-for-like sales rose 2.1%. Better still, the adjusted operating profit margin was 11.7%, compared to management’s guidance for the year that it would exceed 10%.

Source: Company accounts. Fiscal year to September

“However, all five business units – Retail, Grocery, Sugar, Ingredients and Agriculture showed improved earnings in the first half of this year compared to the first half of last.

Source: Company accounts. Fiscal year to September

“That leaves the company well placed to meet or beat the analysts’ consensus forecasts of a 27% increase in stated earnings per share that prevailed ahead of the release of the first-half results. Such positive earnings momentum underpins the share price advance seen since autumn 2022, when tangled supply chains, input costs and the chaos caused by Trussonomics combined to create a much less helpful environment.”

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to September. Numbers before 2013 not directly comparable owing to 2014's IAS19 accounting rules change on employee benefits. Numbers before 2019 not directly comparable owing to IFRS16 accounting rules changes on leases

These articles are for information purposes only and are not a personal recommendation or advice.