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Is Now The Time To Buy FTSE Laggards Diageo plc, British American Tobacco plc And Associated British Foods plc?

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The FTSE 100 has been on a roll since the back-end of last year, breaking through the 7,000 mark in March, and trading above that level as I write.

A number of quality, defensive companies haven’t participated in the great rally. Indeed, the shares of Diageo (LSE: DGE) (NYSE: DEO.US), British American Tobacco (LSE: BATS) (NYSE: BTI.US) and Associated British Foods (LSE: ABF) have all fallen over the last three and six months.

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Even the best companies go through phases of lacklustre performance. Drinks giant Diageo is currently in such a phase, with tough trading conditions in emerging markets, subdued consumer demand in some developed markets, and exchange rates having an adverse impact on sales and profits to boot.

Diageo has been through similar periods in the past, but the ups and downs are mere hiccups on a long-term view. Twenty years ago, the shares were trading at around 450p and the company paid an annual dividend of 13.1p. Today, the shares are trading at around 1,800p and the last annual dividend was 51.7p.

Diageo’s valuation, using yield as a marker, is the same today — 2.9% — as it was 20 years ago. And I see every reason to think that the company can deliver a similarly superb return (a quadrupling of the share price and dividend payout) for investors over the next 20 years. Per capita alcohol consumption in emerging markets is only half that of the developed world, and Diageo’s stable of brands is stronger than ever.

British American Tobacco

Coincidentally, the shares of British American Tobacco (BAT) were also trading at around 450p two decades ago. Today, the price is around 3,650p — an eight-fold increase.

Like Diageo, BAT is currently feeling the impact of adverse exchange rates. The tobacco giant’s revenue last year was down 8%, but up 3% on a constant currency basis, while underlying earnings were down 4% but up 8% at constant currency. There’ll be times when exchange rates work in BAT’s favour. As the long-term performance shows, these things are merely puffs of smoke on the wind.

Tobacco companies seem to be perennially undervalued, and BAT’s trailing dividend yield of over 4% is comfortably above the FTSE 100’s 3.4%. I’m not sure that BAT can deliver the same return to investors in the next 20 years as it did in the last, but with growth in emerging markets, pricing power, new products and industry consolidation, I can’t see profits plateauing — let alone declining — in my lifetime.

Associated British Foods

The 20-year share performance of Associated British Foods (ABF) is the best of the lot, being a nine-fold increase from 320p to 2,940p. Despite its success, the company is probably one of the FTSE 100’s lesser-known names. ABF is a conglomerate with grocery, sugar, agriculture and ingredients businesses — and last, but certainly not least, Primark.

The hugely successful budget clothing chain is growing so fast that it accounts for over 50% of group profits and rising. Primark is expanding its proven format internationally, and has a long “growth runway” — there seems no reason why, over the next decade or two, it can’t become as big as H&M, which is currently three times the size of Primark by sales and seven times the size by space.

The sum-of-the-parts or break-up value of ABF and Primark’s growth prospects, suggest the shares may not be over-valued, even though the price-to-earnings ratio of pushing 30 is considered high by many investors.

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G A Chester has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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