The FTSE 100 has been on a roll since the back-end of last year, breaking through the 7,000 mark in March, and trading above that level as I write.
A number of quality, defensive companies havent participated in the great rally. Indeed, the shares of Diageo (LSE: DGE) (NYSE: DEO.US), British American Tobacco (LSE: BATS) (NYSE: BTI.US) and Associated British Foods (LSE: ABF) have all fallen over the last three and six months.
Now could be a good time for long-term investors to pick up these out-of-favour Footsie laggards.
Diageo
Even the best companies go through phases of lacklustre performance. Drinks giant Diageo is currently in such a phase, with tough trading conditions in emerging markets, subdued consumer demand in some developed markets, and exchange rates having an adverse impact on sales and profits to boot.
Diageo has been through similar periods in the past, but the ups and downs are mere hiccups on a long-term view. Twenty years ago, the shares were trading at around 450p and the company paid an annual dividend of 13.1p. Today, the shares are trading at around 1,800p and the last annual dividend was 51.7p.
Diageos valuation, using yield as a marker, is the same today 2.9% as it was 20 years ago. And I see every reason to think that the company can deliver a similarly superb return (a quadrupling of the share price and dividend payout) for investors over the next 20 years. Per capita alcohol consumption in emerging markets is only half that of the developed world, and Diageos stable of brands is stronger than ever.
British American Tobacco
Coincidentally, the shares of British American Tobacco (BAT) were also trading at around 450p two decades ago. Today, the price is around 3,650p an eight-fold increase.
Like Diageo, BAT is currently feeling the impact of adverse exchange rates. The tobacco giants revenue last year was down 8%, but up 3% on a constant currency basis, while underlying earnings were down 4% but up 8% at constant currency. Therell be times when exchange rates work in BATs favour. As the long-term performance shows, these things are merely puffs of smoke on the wind.
Tobacco companies seem to be perennially undervalued, and BATs trailing dividend yield of over 4% is comfortably above the FTSE 100s 3.4%. Im not sure that BAT can deliver the same return to investors in the next 20 years as it did in the last, but with growth in emerging markets, pricing power, new products and industry consolidation, I cant see profits plateauing let alone declining in my lifetime.
Associated British Foods
The 20-year share performance of Associated British Foods (ABF) is the best of the lot, being a nine-fold increase from 320p to 2,940p. Despite its success, the company is probably one of the FTSE 100s lesser-known names. ABF is a conglomerate with grocery, sugar, agriculture and ingredients businesses and last, but certainly not least, Primark.
The hugely successful budget clothing chain is growing so fast that it accounts for over 50% of group profits and rising. Primark is expanding its proven format internationally, and has a long growth runway there seems no reason why, over the next decade or two, it cant become as big as H&M, which is currently three times the size of Primark by sales and seven times the size by space.
The sum-of-the-parts or break-up value of ABF and Primarks growth prospects, suggest the shares may not be over-valued, even though the price-to-earnings ratio of pushing 30 is considered high by many investors.
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G A Chester has no position in any shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
