Head to Head: Associated British Foods vs. Smiths Group

LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.

Stepping into the ring today are FTSE diversified conglomerates Associated British Foods  (LSE: ABF.L  ) and Smiths Group  (LSE: SMIN.L  ) .

ABF operates in five segments. Grocery, sugar, and ingredients have some similarities, but the group also manufactures animal feeds for the agriculture sector and has a clothing retail business in the form of the Primark chain.

Smiths Group also operates in five segments: threat and contraband detection, medical devices, energy, communications and engineered components.

ABF and Smiths Group have both outperformed the FTSE 100 over the past year. The Footsie is up 8%, while ABF's shares have risen by 26% and Smiths Group's by 14%.

Let's take our seats at ringside.

Round 1: Earnings

 

ABF

Smiths

Recent share price (pence)

1,361

1,076

Last-year price-to-earnings (P/E) ratio

18.4

11.6

Current-year forecast P/E

15.8

11.1

Four-year earnings per share (EPS) compound annual growth rate (CAGR) (%)

9

3

Current-year forecast EPS growth (%)

16

5

Forecast operating margin (%)

8

16

Sources: Digital Look, Morningstar, company reports. Winners in bold.

ABF has strong earnings growth numbers, but Smiths Group edges the first round, scoring points on historic and forecast P/E, and operating margin. It's worth noting, though, that there are different norms for margins among different industries. ABF's businesses -- food manufacture, value retail, and animal feeds -- are in segments that tend to have lower margins than Smiths Group's more technology-based operations. So, giving some weight to that, the first round is tight indeed.

Round 2: Dividends

 

ABF

Smiths

Last-year dividend yield (%)

1.8

3.5

Current-year forecast dividend yield (%)

2.0

3.7

Four-year dividend CAGR (%)

6

3

Current-year forecast dividend growth (%)

12

5

Forecast dividend cover

3.1

2.4

Sources: Digital Look, Morningstar, company reports. Winners in bold.

As with earnings growth, ABF scores strongly on dividend growth. The company also takes a point on dividend cover, giving it a narrow win over Smiths Group, which scores points for superior dividend yield.

Round 3: Balance sheet

 

ABF

Smiths

Price-to-book (P/B) ratio

1.7

4.3

Net gearing (%)

22

81

Sources: Digital Look, Morningstar, company reports. Winners in bold.

ABF finishes strongly, taking both points in round three -- and the overall contest by two rounds to one. The points tally is ABF 7 and Smiths Group 5.

Post-match assessment
This was quite a finely balanced contest, with ABF being superior on growth measures and scoring points on the "quality" fundamentals of dividend cover and gearing. Not surprisingly, the market appreciates ABF's growth and solidity, and the company is on a P/E well above the market average and a dividend yield well below.

In contrast, Smiths Group took four of the five valuation-ratio points. However, while the company's P/E and yield are "cheap" relative to ABF's, they are not so cheap in absolute terms. A prospective P/E of 11.1 and dividend yield of 3.7% don't exactly scream bargain, especially given the fairly mundane earnings and dividend growth record.

Neither company is on my personal shopping list at their current ratings, although in both cases sum-of-the-parts analysts may argue that the P/E and yield don't tell the whole story.

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G.A. Chester does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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