Dividend investors looking for shares to buy have a lot of choices when it comes to the FTSE 100. But I think Associated British Foods (LSE:ABF) is worth a look right now.
The stock has fallen 8% in the last week after its latest set of results. And while these were clearly disappointing, the stock looks interesting from a long-term perspective.
Retail challenges
For those that don’t know, Associated British Foods is – among other things – the company behind value fashion/lifestyle retailer Primark. And I think that’s the firm’s most interesting asset by some margin.
The company has a reputation for low prices and outstanding value. This usually has a pretty durable appeal, but things haven’t gone so well over the last few months.
In the 24 weeks leading up to the start of March, Primark’s revenues grew 1%. That’s not particularly inspiring, but the situation actually gets worse. The growth was entirely driven by the firm opening new stores. On a like-for-like basis, sales were actually down 2.5%, which is quite alarming.
In the short term, ABF thinks Primark will be able to offset declining like-for-like sales by increasing its store count. But it won’t be able to do this indefinitely.
That – along with a weak performance in the company’s sugar division – is why the stock fell 8% this week. There are clear warning signs, but should investors consider being brave here?
Passive income
In its update, Associated British Foods announced no change to its dividend. That means the stock has returned 90p per share over the last 12 months.
The big question is whether this is enough to justify buying the stock. At around £20, the retail difficulties might reasonably put investors off – but I think it’s worth considering.
Primark has a number of advantages in its industry, but the one that stands out the most to me is its e-commerce strategy. Unlike its rivals, the firm doesn’t have a big online presence, its website restricted to ordering goods to ‘Click & Collect’ in store.
That might seem odd given the rise of e-commerce, but I think it’s a major strength. Returns are a huge cost for online clothing retailers and Primark manages to avoid this, while C&C both saves on return postage and gets shoppers through the door, creating further selling opportunities.
Implementing this approach has served Primark well. And while things have been difficult recently, I think the company could do very well over the long term.
The dividend equation
Earning £900 a year in dividends from Associated British Foods shares would require 1,000 shares. At today’s prices, that would cost £20,320.
That’s a lot and investors with that kind of cash should think carefully about what they can do to diversify their investments. But I think the stock’s worth considering at today’s prices.
Investors are clearly disappointed in ABF’s latest results. But the best time to buy any stock is when it’s out of favour and I do think Primark’s worth considering as a quality business with strong prospects.
