The recent market slump has thrown up some fantastic bargains for investors, including several FTSE 100 stocks that have been on my watch list for some time.
Companies like Associated British Foods (LSE: ABF), the sugar-to-retail business best known for its Primark chain of clothing stores.
ABF has churned out a consistent record of earnings growth over the past decade, increasing earnings per share (EPS) by an average of 9% per annum. Its diversification has helped contribute to this record.
For example, at the beginning of September ABF reported that better than expected performance at Primark, which accounts for 54% of group profit, will help the company meet full-year growth expectations, despite a slowdown at its sugar division.
City analysts are expecting EPS growth of 8.3% for 2018, giving a forward P/E of 17.4. This multiple is right at the top of what I would consider appropriate for a business like ABF, although it is significantly below the five-year average, which sits at around 25. What’s more, the company has a tremendous record of dividend growth. Over the past five years, the payout has increased at a steady 8% per annum and is covered three times by EPS, giving a wide margin of safety.
With this being the case, even though the stock only yields 1.9%, I believe ABF is a great income play.
I am optimistic about the outlook for Croda (LSE: CRDA) for a similar reason. While the stock might not support the highest dividend yield on the market, the payout is well covered by EPS and the firm has a robust balance sheet.
Analysts expect Croda to distribute a payout of 88p per share for 2018, implying a dividend yield of 1.9% is on offer. Dividend cover of 2.2 tells me that there is plenty of room for dividend growth here as well. Over the past five years, the payout has grown at an average rate of 6% per annum, and as Croda’s EPS continue to expand, I believe this trend will continue.
The one thing that I’m wary about here, however, is valuation. The stock trades at a forward P/E of 24.5. Would this stop me buying? It is high but I think it is justifiable because, as a speciality chemicals business, the company has a substantial competitive advantage that is unlikely to be disrupted any time soon. I am happy to rate the stock as a ‘buy’ at this level for that reason.
The final company that has attracted my attention is Sage (LSE: SGE).
What I like about this accounting software provider is that revenues are relatively sticky. Companies and sole traders don’t tend to switch accounting software often, giving Sage a predictable, recurring income stream.
Based on current City growth estimates, shares in this business are trading at a forward (2019) P/E of just 15.7, which is high, but it’s a multiple I am prepared to pay given the sticky nature of sales. The multiple is also below the five-year average of around 20.
On top of the steady earning streams, the firm also has a record of steady dividend increases for investors. The payout is up 70% over the past five years and at the current level is covered twice by EPS, leaving plenty of room for further growth. After recent declines the dividend yield has spiked to 3%, the highest level for the stock in several years.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Associated British Foods and Sage Group. 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.