The dividend yield on Associated British Foods‘ (LSE:ABF) shares is decent rather than spectacular, at around 3%. But I believe it’s still one of the FTSE 100‘s most attractive dividend stocks to consider today.
Excluding 2020, the clothes retailer and food supplier has grown annual payouts in nine of the last 10 years alone. And dividends have risen strongly since it suspended dividends during the Covid-19 pandemic.
For the last financial year (ended September), ABF increased the ordinary dividend 33% to 63p per share. It also forked out a 27p per share special dividend.
City analysts expect this impressive record of dividend rises to continue over the next three years at least, albeit at a lower rate.
Financial year
Dividend per share
Dividend growth
Dividend yield
2025
68.55p
9%
3.1%
2026
73.40p
7%
3.3%
2027
76.20p
4%
3.4%
Of course, past performance is no guarantee of future returns. So I need to consider carefully how realistic these projections are.
On top of this, I need to consider the potential for further share price weakness that may offset any growing dividends. ABF shares have fallen 5.5% in value over the past year.
Here’s my verdict.
Looking good
The first thing to look at is how well predicted dividends are covered by expected earnings. I’m searching for a reading of 2 times and above.
Pleasingly, Associated British Foods scores high here. For the three years to fiscal 2027, dividend cover’s between 2.8 times and 2.9 times. This provides a decent margin of safety in case profits disappoint.
In other good news, ABF’s strong balance sheet gives it added flexibility to keep growing dividends at a rapid pace. Its net debt to adjusted EBITDA ratio was just 0.7 as of September, comfortably within its target of “well under 1.5 times“.
Encouragingly, ABF says that “surplus capital may be returned to shareholders by special dividends or share buybacks” if the ratio sits below 1. It’s a pledge the company continues to make good on.
As well as paying that special dividend for last year, the firm announced a further share buyback programme. It plans to repurchase £500m of its shares up until next September.
A top FTSE stock
Things are looking bright for ABF investors chasing dividends then. But as I say, share pickers need to also consider the possibility of further price weakness that could damage returns.
Fierce competition at Primark is just one threat to the company’s market value. Other risks include rising costs, and particularly massive expenses related to its global expansion strategy.
However, I’m expecting ABF’s share price to recover robustly over time. I’m most excited by the outlook for Primark as demand for value clothing soars the world over.
And so far, the company’s store rollout programme is effectively capitalising on this opportunity. New stores in its US and European markets drove sales 6% higher in fiscal 2024.
The business also offers diversification through its robust food and ingredients divisions. On balance, I think it’s a top income stock to consider.
The post Great dividend stocks! Here’s the forecast for Associated British Food shares to 2027 appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
2 UK shares that insiders have been buying this month
Down 16%+, here’s 2 unloved FTSE 100 shares for savvy investors to consider!
Best British value stocks to consider buying in November
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods Plc. 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.