As the Tate & Lyle (LSE:TATE) share price hits its lowest levels since 2009, AJ Bell investors have been buying. But is the stock a durable long-term opportunity or a trap?
The stock is one of the FTSE 250’s worst performers so far this year and a profit warning just sent the share price even lower. From a long-term perspective, though, there’s a lot to like.
Healthy eating
I don’t think I can imagine a business I’d like to be in less right now than sugar. It’s a commodity product where I think the market is in decline as consumers shift towards healthier choices.
Fortunately, that’s not what Tate & Lyle does any more – it sold off its sugar refining business back in 2010. In fact, it’s kind of the opposite these days.
The firm’s products are focused on things like protein and low-calorie sweeteners. And it’s actively working to help food producers reduce the amount of sugar in their products.
Despite this, the stock hasn’t been a success recently. The firm has returned £1.27 in dividends per share since 2020, but this hasn’t been nearly enough to offset a £4.18 drop in the share price.
Why is the stock down?
Earlier this week, Tate & Lyle warned that revenues and profits are set to be lower in the first half of its financial year. The reason is relatively simple – demand has been weak.
This largely looks like a macroeconomic issue. In a tough environment, consumers are reducing their consumption volumes and shifting towards cheaper alternatives.
As a result, food manufacturers are buying less in the way of ingredients. The firm is doing what it can to offset this, but sales are stil likely to be lower than the previous year.
This highlights an important cyclical risk, which it might be easy to miss in the context of a food business. And investors haven’t responded well to the news, which is why the stock is down.
Competitive strengths
Consumers can’t reduce their food intake forever, though, and Tate & Lyle does seem to be on to a long-term trend with the move to healthier eating. And it has a number of key strengths.
Its specialist expertise and existing relationships with major food manufacturers is a big positive. The scale of its operations also gives it an advantage when it comes to acquisition opportunities.
The firm’s move to acquire CP Kelco last year is a good example. Tate & Lyle’s global reach gives it an immediate opportunity to expand the business into new markets.
Given this – and the long-term demand for food products that comes from a growing population – it’s easy to see why investors have been buying the stock. And then there’s the dividend.
Time to buy?
As a result of the latest decline, Tate & Lyle shares come with an unusually high dividend yield. That can be a sign of a business in distress, but I don’t think that’s the case here.
The company looks like it’s well-positioned to benefit from a long-term shift towards healthy eating. And I think that means investors should think seriously about taking advantage of the dip.
