Tate & Lyle shows dividend appeal

by Graeme Evans from interactive investor |

A strategy revamp at ingredients giant Tate & Lyle is rewarding investors, despite a shares wobble today.

In a week of more jitters over high-yielding stocks, results from Tate & Lyle (LSE:TATE) have provided investors with a well timed reminder about a more sustainable dividend approach.

Alongside Tate's 4% rise in annual profits to £309 million, the ingredients company increased its annual dividend by 2.4% to 29.4p a share today. Based on City expectations for further strong cash flows in 2020, the shares trade with an attractive dividend yield of just under 4%.

The investment case at Tate has been strengthened by optimism over the progress being made by chief executive Nick Hampton, who stepped up from finance director in April 2018 and has overseen the company's transition to a more "dynamic culture".

This has included greater focus on customers, with Tate moving from being just an ingredients supplier to engaging more closely with customers at CEO, R&D and marketing levels.

New product development has also resulted in a 24% increase in the expected value of the company's innovation pipeline, including a greater emphasis on line extensions and projects to create new generations of existing ingredients.

Meanwhile, Tate is on track to deliver its target of $100 million of productivity benefits over a four-year period.

Hampton's strategy has certainly impressed the City, with the shares last week briefly touching the 800p mark for the first time in more than two years. They stuttered today, however, after the company only forecast a modest rise in earnings per share for 2020.

This reflects the anticipation of lower sucralose profits and continued pressure on its primary products division, which includes high-volume sweeteners and industrial starches. However, Tate still expects continued progress in food and beverages after a 3% profits rise in the last financial year.

Analysts at Liberum said the margin potential in the food division meant there was strong upside risk to both earnings and the share price. They added:

"Our benchmarking analysis with closest peer Ingredion suggests strong potential share price upside if Tate can approach Ingredion's margin levels in speciality ingredients."

Reiterating their 900p target, Liberum said shares appeared cheap on a price/earnings multiple of 14.8x, with the company forecast to grow its dividend by another 2.5% to 30.2p in 2020.

Shore Capital analyst Darren Shirley has a target price of 792p and said the 2019 results made for pleasing reading. He expects to keep his 2020 forecasts unchanged, despite the cautious guidance from the company.

Shirley said the investment case for Tate remained unchanged, with 40% of profitability in the higher-valued food and beverage category and set for mid-high single digit growth over the medium term. The focus for the rest of the business - sucralose and primary products - is about "maintenance and managed decline", he added.

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