Legendary US investor Warren Buffett’s favourite holding period for a stock is ‘forever’. Obviously, such a business must have certain qualities that not all companies possess. One FTSE 100 firm I reckon has many of these qualities is Associated British Foods (LSE: ABF) which released its latest annual results today. It owns the mighty Primark and several other businesses in a conglomerate structure not unlike Buffett’s own Berkshire Hathaway group.
If you’re looking to buy and hold a stock forever, you need management of quality and integrity, who run the business with a focus on its long-term growth, as opposed to hitting short-term targets. Descendents of ABF’s founding family continue to steer the company and are major shareholders. As such, the business is stewarded with a generational perspective, making it an attractive proposition as a lifetime investment.
Buffett also likes to see little or no debt in a company, because a strong balance sheet is a great asset during downturns in the economic cycle that are inevitable if you’re holding a stock over a long period. ABF today reported net cash of £614m at its financial year-end of 15 September and historically has maintained a robust balance sheet.
Buffett likes high profit margins. Primark, in particular, scores excellently here and today’s results showed an uptick in operating margin to 11.3% from 10.4% last year. Strong consumer brands are another Buffett favourite (Coca-Cola is one of his longstanding holdings). ABF has a number of much-loved brands within its grocery division, including Ovaltine and Twinings, both of which performed particularly strongly over the last year. Finally, return on capital employed (ROCE) is a key measure for Buffett, because it shows how efficient a company is at generating profits from its capital. Today’s results showed ABF maintaining its strong ROCE at over 20%.
Still a steal
At the time of the group’s pre-close trading update in September, analysts were forecasting earnings per share (EPS) of 133.5p and a dividend of 43.75p for the year. The shares were trading at 2,250p, giving a price-to-earnings (P/E) ratio of 17 and a dividend yield of 1.9%. I noted that the stock hadn’t been this cheap for five years and I reckoned it was a steal.
Actual EPS came in at 134.9p and the dividend at 45p, which explains why the shares are at the top of the FTSE 100 leader board as I’m writing with a 2.5% rise on the day to 2,448p. The P/E is now a little above 18 and the dividend yield is 1.8%, and while the company has guided that it expects no advance in EPS this year, I continue to rate the stock a ‘buy’.
The one disappointing division at the moment among ABF’s businesses is sugar. Historically, profits from this arm have been volatile at the best of times but the recent ending of the EU sugar regime and removal of sales quotas has seen EU prices move very substantially lower, adversely affecting ABF’s UK and Spanish businesses (its African sugar business continued to be highly profitable).
Weak EU sugar prices are behind the guidance of no advance in EPS this year, but what’s one year in a holding period of forever?
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods and Berkshire Hathaway (B shares). 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.