With the share price near 676p, food ingredients specialist Tate & Lyle (LSE: TATE) has a forward-looking dividend yield of around 4.6%. The calculation factors in City analysts’ estimates for the dividend in the trading year to March 2023.
Steady trading and financial record
I like the dividend payer because of its steady multi-year financial and trading record. And the business has the advantage of operating in the food sector. I see the industry as attractive because of its defensive tendencies. There’s often consistent demand for food and food-related products no matter what the wider economy is doing.
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However, Tate & Lyle is potentially more than just a sleepy cash-cow business. Back in July, the company announced its intention to reposition itself as a “growth-focused” global food and beverage operator. And in a bold move, proposed separating its business into two companies.
One will be Tate & Lyle, which the directors describe as a food and beverage solutions business focused on faster-growing speciality markets. And the other will be NewCo, which they describe as a leader in plant-based products for the food and industrial markets.
NewCo will own Tate & Lyle’s “primary products” business. And that means operations nearer the beginning of the food-production chain, such as corn wet mills in the USA, and acidulants plants in the USA and Brazil.
Tate & Lyle plans to joint-own NewCo with a company called KPS Capital partners. Each will own 50% of NewCo with KPS running the show and having board and operational control. Tate & Lyle expects to receive gross cash proceeds of around $1.3bn for the sale of the controlling stake in NewCo.
Squeezing more value and potential from the business
But Tate & Lyle’s 50% equity interest will ensure the company benefits from NewCo’s success via a stream of future dividends if things go well. And the potential deal looks to me like an elegant solution for squeezing value from the existing Tate & Lyle set-up. The two standalone businesses will be able to concentrate on their respective strategies. And I reckon a narrower focus is almost always a good thing in business — it trumps trying to deal with too much and aiming to be all things to everyone.
We gained insight into the proposed new, streamlined Tate & Lyle’s potential in a news release delivered on 19 October. The company reported opening its new technical application centre in Dubai. And the directors reckon the $2m “state-of-the-art” centre will house the company’s food scientists. And they will focus on developing solutions for food and beverage customers in the Middle East, Turkey and Africa. In those areas, along with other regions, there’s a “growing demand” for foods with less sugar, fat and calories, and more fibre.
I think the company’s investment in the area underlines its commitment to pursue growth markets wherever it sees them emerging. And we could see some steady operational advances pushing shareholder dividends and the stock price higher in the years to come.
Of course, nothing is certain and the company could face setbacks ahead causing the share price to fall. Indeed, City analysts have yet to predict any meaningful growth in earnings over the next couple of years. Nevertheless, I’m tempted to hold some of the shares to collect the dividend while waiting for growth to arrive.