An under-the-radar FTSE 100 stock to combat stagflation fears

As the share price of this blue-chip FTSE 100 stock falls below Covid-levels, why I added it to my portfolio.

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Finding bargains in the blue-chip FTSE 100 index isn’t an easy task. Often companies will be at bargain prices, but for only a limited period of time. That is why I always make sure that I deduct a small amount from my monthly pay packet, to ensure I have some dry powder to seize on any share price weakness among my watchlist stocks.

However, sometimes an excellently run business will fall out of favour as far as both retail investors and analysts are concerned for an extended period of time.

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A diversified business

Associated British Foods (LSE: ABF) is down over 26% over the last 12 months. It’s something of an enigma in the FTSE index as it has its fingers in many — and varied — pies.  It’s mostly known as the owner of leading fast-fashion brand Primark, which accounts for 45% of revenues.

But it also owns a host of leading brands including Kingsmill, Twinings, Ryvita and Silver Spoon. And if that wasn’t enough, it’s also a producer of many of the raw materials that make up these products, including sugar beet, flour milling and enzymes for yeast production.

It also owns a thriving agriculture business that manufactures animal feed for pigs, poultry and dairy. With a growing world population, this division deploys the latest technological developments to increase yields and reduce environmental pressures.

Half-year results

For the six months ending March 2022, ABF posted revenue growth in four out of five business divisions. Growth was particularly prominent in Retail, with revenues up 64% on the same period last year.

The only division to post lower revenues was Grocery. This was in large part due to its bakery operations seeing significantly lower volumes, as it lost a large contract to supply Kingsmill to the Co-Op. It also faced a margin squeeze from rising input costs, particularly gas and wheat.

But the outlook for 2022 remains strong. As Covid restrictions have eased, Primark has been the undoubted beneficiary. The business is expecting sales in the second half of the year to surpass those it saw in the same period in 2019.

However, as inflationary pressures begin to take hold, it has been forced to raise prices across some of its autumn/winter range. That could be a risk given that a big part of its appeal in its low prices.

Yet the business is so confident in its outlook that it paid a special dividend in 2021. And in 2022, it declared an interim dividend per share 123% higher than last year.

A stagflationary hedge

ABF’s highly diversified business model should help it weather the coming economic storm.

In environments characterised by low growth, wage price spirals and sky-rocketing inflation, retail businesses that tend to do well are those that either cater for the top end or lower end of the market.

Primark is perfectly placed to prosper in a stagflation environment. People will always need clothes, and I expect holiday-wear sales to hold up, particularly as pent-up demand is unleashed post-pandemic.

As a business that sources raw materials in different geographies, the increasing strength of the US dollar is likely to remain a headwind for the rest of 2022. But as the share price has weakened, I’ve taken the opportunity to add it to my portfolio.

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Andrew Mackie owns shares in Associated British Foods. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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