Big lottery jackpots tempt millions of people a week to part with their cash in the hope of a bumper payday. However, with the chance of winning a life-changing sum being microscopically small, I believe regularly investing in FTSE 100 stocks is a far better way to aim to get rich.
A share of £366m
One company I’d be happy to invest in today is Associated British Foods (LSE: ABF), the owner of Primark, as well as several food businesses. The group released its latest annual results this morning and reported a profit of £1.3bn. When it pays its final dividend on 10 January, it will have distributed £366m to shareholders this financial year, 3% more than last year.
Forget tonight’s £74m EuroMillions jackpot! I’d rather put my money in ABF and have a share of that £366m. And that’s just one year. If the company continues increasing its annual profits and dividends, it’ll hand me more and more cash each year. Furthermore, if I regularly buy more shares and reinvest my dividends, I’ll own a bigger and bigger part of the business, meaning more of those annual millions paid to shareholders will come my way.
Rising profits and dividends would also see the business become more valuable. If so, other investors would be willing to pay higher prices for owning a share of it, meaning the value of my shares would increase.
Let me tell you now about ABF’s results today, and why I think now is a great time to invest in the company for the long term.
Primark is ABF’s biggest business, accounting for half of the group’s revenue. This increased 4%, with operating profit rising 8% to £913m. The group’s grocery business (around 20% of revenue), which includes brands such as Twinings, Dorset Cereals and Ryvita, also performed strongly. Revenue increased 2% and operating profit 10% to £380m.
Profits at the group’s three smaller divisions, sugar, ingredients and agriculture (each around 10% of revenue), were lower than last year. Sugar profits were hit particularly hard — down to £26m from £123m — in a year impacted by a radical change in the European sugar market.
However, the performance of Primark and grocery more than offset the profit weakness in the other divisions. Group underlying earnings per share (EPS) increased 2% on 2% higher revenue. Management described it as a “resilient performance,” and looking ahead, said ABF is “well-positioned for further progress, with the continued expansion of Primark, a material improvement in our sugar profit and strong profit growth in grocery.”
ABF’s shares are up over 4% on the day, as I’m writing, and top the FTSE 100 risers board. Nevertheless, at 2,350p they remain well below their all-time high of over 3,500p. A valuation of 17.1 times today’s reported EPS and running dividend yield of 2% is generous by historical standards, and one big reason why I think now is a great time to buy the shares.
Another reason is a recent assessment by analysts at Berenberg. Comparing ABF’s smaller businesses with the valuations of their peers, Berenberg concluded that Primark is at a 44% discount to Next compared with its usual historical premium of 19%. This “despite its superior business model … and significant international growth opportunity.”
All told, I’d much rather buy ABF’s discount shares, and long-term profit and dividend growth prospects, than a ticket in tonight’s EuroMillions lottery!
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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.