Primark owner Associated British Foods PLC (LSE:ABF)’s exceptionally strong set of financial results has provided a much-needed sentiment boost for the London stock market.
It wasn’t just cornerstone asset Primark driving profits; the group’s grocery segment grew operating profits by a chunky 34%, while the ingredients division grew by 16%. Both segments beat prior forecasts.
It was an all-round top performance that saw AB Foods’ shares rally 9.5% on Tuesday to a six-year high.
“A surge in Associated British Foods’ shares to their highest mark since 2018 may therefore be indicative of a mood shift in London,” said AJ Bell investment director Russ Mould.
“A big jump in first-half profits, a huge hike in the interim dividend and ongoing share buybacks are all helping the share price and management’s outlook statement is suitably confident.”
On the back of these profits, AB Foods’ interim dividend jumped 46% to 20.7p a share, suggesting that the City’s forecasts of a 30% year-on-year hike for the full year “are already looking conservative”, according to Mould.
AB Foods’ management’s optimism is further reflected in the ongoing £500 million share buyback programme; the second of its kind implemented by the Primark owner.
Put together, that amounts to about double the amount of returns on a yearly comparison coming shareholders’ way in 2024.
This makes AB Foods an exemplar of the de-equitisation story sweeping across Europe and the UK.
According to research published by Goldman Sachs, the continent’s supply of public equity is shrinking at the fastest rate in history.
Goldman expects the STOXX 600 index (comprising Europe and the UK’s largest listed companies) to return half a trillion euros (£431.4 billion/US$533 billion) to shareholders between now and the end of 2025.
Shareholders, specifically of British companies, are demanding these superior cash yields to compensate for the uncertain future facing London-listed stocks.
As Mould explained: “The figure is so high because sentiment toward the UK is so downbeat, either for reasons of economics, politics or that run of firms who are looking to leave London and list elsewhere (or float on a different stock exchange).
“As a result, investors are demanding a high yield, or cash return, to compensate themselves for the perceived risks.”
But if more big caps start posting outlook statements as bullish as AB Foods’, this risk premium could start to fall.
“It is early days, and the UK still has a lot of underperformance to catch up, especially relative to the USA. But more confident outlook statements from firms such as Associated British Foods can only help,” said Mould.
AB Foods stock was trading at a six-year high of 2,750 at the time of writing.