Should I Invest in Associated British Foods?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of about 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value. So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at Associated British Foods (LSE: ABF  ) , the diversified food-production and retailing group.

With the shares at 1825 pence, the company's market cap. is £14.4 million.

This table summarizes the firm's recent financial record:

 

2008

2009

2010

2011

2012

Revenue (millions)

£8,235

£9,255

£10,167

£11,065

£12,252

Net cash from operations (millions)

£553

£833

£1,172

£736

£1,240

Adjusted earnings per share (pence)

54.9

57.7

72.2

74

87.2

Dividend per share (pence)

20.25

21

23.8

24.75

28.5

With its curious blend of food production and clothes retailing, Associated British Foods has been flying. The recent half-year results trumpeted double-digit growth in revenue, earnings, and the dividend.

You've probably heard of the firm's brands, many of them household names in Britain. Perhaps the most unexpected brand in the stable, though, is Primark, the clothing retail chain, which delivered about 32% of the firm's profit last year. Meanwhile, sugar production earned 46% of profit, grocery 16%, agriculture 3%, and ingredients 3%.

The directors have lofty ambitions for sugar, aiming to be the world's leading sugar business. Meanwhile, Primark is enjoying a successful expansion program in continental Europe, which the firm identifies as having good potential. However, the U.K. is still important to the group, providing 59% of operating profit last year. Europe and Africa contributed 30%, the Americas 9%, and the Asia-Pacific 2%.

Associated British Foods is growing on a number of fronts, and that makes me optimistic about the firm's total-return prospects.

Total-return potential
Let's examine five indicators to help judge the quality of Associated British Food's total-return potential:

  1. Dividend cover: Adjusted earnings covered last year's dividend just more than three times. Score: 5/5
  2. Borrowings: Net debt is running at about 1.5 times the level of operating profit. Score: 4/5
  3. Growth: Growing revenue and earnings with solid support from cash flow. Score: 5/5
  4. Price to earnings: A forward 17.5 looks ahead of growth and yield expectations. Score: 2/5
  5. Outlook: Good recent trading and a positive outlook. Score: 5/5

Overall, I score Associated British Foods 21 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return going forward.

Foolish summary
Associated British Foods scores well on my business quality indicators, and the full-looking valuation recognizes that. I'm keeping an eye on the company for an appealing entry point. It's on my list of attractive growth opportunities, along with a share that one of the Fool's top investment writers has uncovered.

He has put his money where his mouth is by investing and believes the share is the "Motley Fool's Top Growth Share for 2013." In this new Fool report, you can discover how the firm has reenvisioned itself to allow for tremendous growth along new horizons. Right now, the report is free to download and tells you exactly why our expert has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy, click here.


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