A2M share price in focus
Founded in New Zealand in 2000, The a2 Milk Company specialises in dairy products that contain the naturally occurring A2 protein type, sold under the a2 brand.
The company does not produce its products directly but partners with over 25 certified dairy farms across Australia, where suppliers handle the production. Additionally, its instant formula products are manufactured by its supply partner, Synlait Milk, in New Zealand.
A key selling point of a2 Milk is its claimed health benefits, particularly its easier digestibility compared to regular milk. This makes it a suitable option for people who typically experience digestive issues with standard milk.
The appeal of Consumer staples
The S&P/ASX200 Consumer Staples Index (ASX: XSJ) has delivered returns of -1.36% per year over the last 5 years. That compares to the broader ASX 200 which has returned 4.66% per year over the same period. Let’s explore why a consumer staples company like A2M could be a smart choice for your portfolio.
Big dividends
Consumer staples companies aren’t typically known for rapid growth, but where they excel is in providing consistent dividend income. While this applies to many consumer staples companies, A2M has been an exception delivering a yield of only 0.28% over the last 5 years. This goes to show that even if a sector is known for high growth or dividends, every company needs to be considered on its own merit.
Resilience
No company or sector is totally immune to recessions, but consumer staples companies are often better equipped than others to weather economic downturns. When the economy hits tough times (which is inevitable), discretionary spending always takes the hit first. Demand for staples remains relatively stable in comparison. This resilience can give companies like A2M a notable advantage over more cyclical secotrs during a downturn.
Lower volatility
Another key benefit of consumer staples companies is their lower market volatility. Because the demand for their products and services is consistent, these businesses are less subject to economic cycles than sectors like resources and commodities.
Companies like Woolworths or Coles also have high market share which tends to give them more pricing power, so they can act as a price maker instead of a price taker. So, consumer staples companies can bring some stability to a diversified portfolio.
A2M share price valuation
As a growth company, one way to put a broad estimate on the A2M share price could be to compare its price-to-sales multiple over time. Currently, A2 Milk Company Ltd shares have a price-sales ratio of 2.97x, compared to its 5-year average of 3.44x, meaning its shares are trading below their historical average. This could mean that the share price has fallen, or sales have increased. In the case of A2M, revenue has been growing over the last 3 years.
Please keep in mind that context is important – and this is just one valuation technique. Investment decisions can’t just be based on one metric.
The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the A2M share price.
