This blue chip offers both stability and growth.
Bread is probably the most important foodstuff in the western world, perhaps sharing the slot with potatoes. It is often called "The Staff of Life" and as Woodrow Wilson pointed out bread is the first petition in the Lord's Prayer.
Most people will eat bread daily in some form and the business of baking and selling bread has been quite profitable over the years.
But today's market for bread is what economists call "mature" as there is little scope for strong growth in sales and profits. Consequently firms operating in this market have either had to accept this or diversify elsewhere.
Britain's biggest bread producer is the FTSE 100 index member Associated British Foods (LSE: ABF). Founded in 1935 by the Canadian businessman Garfield Weston, 54.5% of ABF is owned by Wittington Investments, a private company which in turn is owned by members of the Weston family (20.8%) and one of the largest charities in Britain, the Garfield Weston Foundation (79.2%).
Bread making is a very stable business with fairly predictable profits as ABF's figures demonstrate (see below). ABF's strategy is to reinvest profits from the lower margin bread and food businesses into higher margin businesses such as the clothing retailer Primark, which produces a quarter of ABF's turnover but a third of its profits.
Bread, Clothes, Sugar And Tea
At least one product from ABF's portfolio of brands can be found in the typical British shopping trolley; these include Allinson, Kingsmill and Sunblest breads, Jordans cereal, Mazola cooking oil, Ovaltine, Patak's spices, Ryvita, Silver Spoon sugar and Twinings tea.
ABF has extensive interests in animal feed production and it is the second largest sugar producer in the world, growing and refining both sugar cane and beets in China, Spain and South Africa. It also owns British Sugar, the monopoly refiner of British sugar beet, and produces equipment and the ingredients for bread making, including speciality flours. ABF is also a major producer of Australian meat and dairy products.
ABF's sugar and agriculture businesses have moved into bioethanol production and seed enhancement and it is businesses such as these, and Primark, where much of the future growth in profits is expected to come from. Whilst people will always need bread, the bread business is never going to produce spectacular profits growth, whereas Primark's expansion program caused its sales to grow by 20% in 2009.
Around 45% of ABF's turnover and 50% of its profits come from the UK where its businesses face stiff competition from numerous food manufacturers including Premier Foods (LSE: PFD), Reckitt Benckiser (LSE: RB), Tate & Lyle (LSE: TATE) and Unilever (LSE: ULVR).
Primark faces competition from the UK high street clothes retailers which include H&M, Matalan, TopShop, but also supermarkets such as ASDA and Tesco (LSE: TSCO) which are muscling into the low-cost clothing market, and from many other retailers as it continues its programme of European expansion.
In its overseas markets competition comes from other major food multinationals such as Nestlé, Cadbury's (LSE: CBRY) suitor Kraft and numerous smaller local producers.
A Look At The Numbers
I've summarised ABF's financial performance for the last five years in the table below. The company prefers to use its adjusted earnings per share figure which excludes one-off charges such as profits and losses from sales of companies and goodwill write-offs, rather than the statutory earnings per share figures (the net profit figure is after the deduction of minority interests).
| | 2009 | 2008 | 2007 | 2006 | 2005 |
|---|
| Adjusted eps | 57.7p | 54.9p | 52.9p | 50.9p | 53.0p |
| Statutory diluted eps | 45.5p | 45.2p | 46.7p | 38.1p | 42.2p |
| Dividend | 21.0p | 20.25p | 19.5p | 18.75p | 18.0p |
| Sales £ million | 9,255 | 8,235 | 6,800 | 5,996 | 5,622 |
| Net Profit £ million | 359 | 357 | 369 | 301 | 333 |
As you can see, earnings per share have remained fairly steady whilst the company has increased its dividend by 0.75p per year.
Currently ABF's shares are on a historic P/E ratio of 17.9 or 14.1 depending on whether you prefer the adjusted eps or statutory diluted eps, and yield 2.6%.
ABF's P/E ratio indicates that investors are expecting some reasonable growth prospects. Profits have been relatively static for the last few years; looking at the above table we see that whilst sales have grown by over 64% in the past five years, net profits and earnings per share have only grown by 7.8%.
Some of this difference is accounted for by one-off costs and funding Primark's expansion. ABF's relatively high P/E ratio reflects investors' belief that Primark (and some other non-bread businesses) will continue to grow strongly. In particular, when Britain comes out of the recession Primark is expected to retain many of its newer customers who switched to cheaper clothes during the recession.
ABF offers reassurance to investors who have concerns over debt; its borrowings are equivalent to only 15% of its total assets.
Associated British Foods' is a very stable business with some reasonable growth prospects. That will offer great comfort to many investors after the excitement of recent times, where "sexy businesses" have decimated their portfolios. Investors who are seeking something racier will probably look elsewhere.
More from Tony Luckett:
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> Tony owns shares in Unilever.
