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£2k to invest? 2 FTSE 100 stocks I’d buy in May

If I had £2k to invest in May, I’d split it two ways and buy shares in Primark-owner Associated British Foods (LSE: ABF) and British American Tobacco (LSE: BATS).

The two companies have a couple of key things in common. They’re well-managed businesses and are long-term outperformers of the FTSE 100 — this despite their share prices currently being well below their previous highs.

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ABF is over 25% below its all-time peak, and BAT is down around 45%. Nevertheless, ABF’s annualised total return (capital growth plus dividends) of 15% over the last 10 years has smashed the Footsie’s 10.1%. And BAT, even with its share price having almost halved, has outperformed with an annualised 10.7%.

The fact that both are long-term outperformers, trading at big discounts to their previous highs, makes them particularly attractive stocks to buy at the present time, in my view.

Not peak Primark

The world’s biggest Primark store opened in Birmingham a couple of weeks ago. Covering 160,000 sq ft over five floors, it comes complete with Disney-themed cafe, beauty studio, barber’s shop and other experiential offerings.

Seeing the mass media coverage and thousands queuing for the grand opening, I wondered if we were seeing peak Primark. Would we be looking back in a few years’ time, saying this was the day that prefigured the mighty retailer’s decline?

It was a fleeting thought. I’m confident Primark’s growth has further to run — a lot further — both at home and abroad. Europe is a market it’s already thriving in, while its more recent entry into the US represents a huge opportunity.

Long growth runway

Parent company ABF’s half-year results last week, reviewed by my colleague Alan Oscroft, revealed a 25% increase in Primark’s profit. And the retailer’s growth story is ably supported by some solid food businesses in the ABF conglomerate.

The shares are trading at 19 times forecast earnings. I view this as good value, due to Primark’s long growth runway. However, investors after a high income will have to look to my second selection, because ABF’s prospective dividend yield is a modest 1.8%.

Negative sentiment

Investor sentiment towards tobacco stocks dived last year on rising concerns about regulation, particularly in the US. There’s been a bit of a recovery in sentiment this year but, as I mentioned earlier, BAT’s shares are around 45% below their all-time high.

The depressed price means the stock trades at just 9.5 times forecast earnings, and offers a prospective 7% dividend yield. For me, the metrics look good both for income seekers and investors looking to compound capital growth by reinvesting the dividends.

Great value

BAT held its AGM last Thursday, and the chairman couldn’t have sounded more upbeat about the future of the company. In his speech to shareholders, he said the matters of regulation and competitor dynamics in next-generation products, far from being negatives, “in fact present significant opportunities” for BAT. And he said he’s confident the group is in a strong position to deliver sustainable long-term earnings growth and dividend increases.

This very much accords with the view I’d taken on the company. I think the market has become far too pessimistic about BAT’s prospects and that, in due course, it will revert to rating it on a higher earnings multiple. As such, I think the stock offers great value today.

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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. 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.