FTSE 250 giant
Tate & Lyle’s journey began back in the 1920s as a sugar refining business. Fast forward 50 years and it shrewdly began to diversify its product range in the 1970s. It now focuses on producing bulk ingredients for food manufacturers.
As I write, shares are trading for 703p per share. The share price is down nearly 10% in the last three months since the announcement of full-year results and the news that the business would be split in half. This will happen by selling parts of the business. I am not concerned by the share price drop. In fact, I see it as an opportunity to buy shares in the FTSE 250 incumbent cheaper than usual.
Tate’s announcement will benefit it in the long term in my opinion. The new business will focus on plant-based products for food and industrial markets. The legacy business will remain as is but focus on faster-growing speciality markets. This repositioning will allow it to capitalise on consumer demand for healthier options. Demand for healthier options has increased since the pandemic began.
Tate will receive £0.9bn from the sale of its interest in the new company. Tate’s management team have committed to using £500m to return to investors. As a potential investor, this is enticing. The rest will pay down debt and fund growth plans. I believe this could be a very savvy move by one of the oldest listed businesses in the UK.
Two reasons I like Tate & Lyle
- Tate has excellent defensive qualities. I believe all food production firms have excellent defensive qualities. Consumer staples such as food items are essential for everyday use. Consumers are unable to eliminate them from their budgets totally even in times of financial issues. The pandemic has seen demand for food increase.
- Tate has a consistent track record of performance. I am aware that past performance is not a guarantee of the future. For example, for the three years between 2018 to 2020, revenue and gross profit grew year-on-year for three years. In 2021, which covered the period of the start of the pandemic in March 2020 to March 2021, the FTSE 250 incumbent saw a slight drop in revenue but still recorded over £2.8bn. It has also consistently paid a dividend, which would make me a passive income.
Risk and reward
Like all FTSE 250 stocks, Tate does have its risks. Firstly, food production is highly specialised and can be costly. It is also highly regulated. If Tate were to have any issues around quality its reputation and share price could be affected negatively. In addition to this, food production is very competitive. Just because Tate has a long history of success behind it does not mean it will always maintain its place in the market. The competition will continue to try and outmanoeuvre it, which again, could affect financials and investor sentiment.
Overall, I do believe Tate is one of the best stocks to buy on the FTSE 250. It has an excellent track record, pays a dividend regularly, and has defensive qualities. I would happily add shares to my portfolio if I had £1,000 to invest right now.
Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.