A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, Associated British Foods plc (LON:ABF) has paid dividends to shareholders, and these days it yields 1.9%. Should it have a place in your portfolio? Let’s take a look at Associated British Foods in more detail.
5 checks you should use to assess a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
- Has dividend per share risen in the past couple of years?
- Is its earnings sufficient to payout dividend at the current rate?
- Will it have the ability to keep paying its dividends going forward?
How well does Associated British Foods fit our criteria?
The current trailing twelve-month payout ratio for the stock is 35%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a payout ratio of 34% which, assuming the share price stays the same, leads to a dividend yield of 2.2%. In addition to this, EPS should increase to £1.34.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. In the case of ABF it has increased its DPS from £0.20 to £0.45 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. This is an impressive feat, which makes ABF a true dividend rockstar.
In terms of its peers, Associated British Foods produces a yield of 1.9%, which is on the low-side for Food stocks.
Taking into account the dividend metrics, Associated British Foods ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company’s fundamentals and underlying business before making an investment decision. I’ve put together three pertinent factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for ABF’s future growth? Take a look at our free research report of analyst consensus for ABF’s outlook.
- Valuation: What is ABF worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ABF is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.