Head To Head: Compass vs Tate & Lyle

Published in Investing on 11 December 2012

Which blue-chip food business should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are contract caterer Compass Group (LSE: CPG) and food ingredients firm Tate & Lyle (LSE: TATE).

The shares of both companies have out-performed the FTSE 100 over the past year. The Footsie is up 7%, but Tate & Lyle is up 12% and Compass 25%.

Let's take our seats at ringside.

Round 1: earnings

 CompassTate & Lyle
Recent share price735p769p
Last year price-to-earnings (P/E) ratio17.313.4
Current year forecast P/E16.013.5
Four-year earnings per share (EPS) compound annual growth rate (CAGR) (%)1813
Current year forecast EPS growth (%)8-1
Forecast operating margin (%)6.610.0

Source: Digital Look. Winners in bold.

Tate wins the points for P/E, but Compass scores on earnings growth. The first round is decided in Tate's favour when it takes the final point for a superior operating margin.

Round 2: dividends

 CompassTate & Lyle
Last year dividend yield (%)2.93.2
Current year forecast dividend yield (%)3.13.4
Four-year dividend CAGR (%)152
Current year forecast dividend growth (%)85
Forecast dividend cover2.02.2

Source: Digital Look. Winners in bold.

It's a similar story in round two. Tate again takes the first two points and Compass hits back with its growth numbers. Again, the round is decided in Tate's favour on the final point -- this time, more conservative dividend cover.

Round 3: balance sheet

 CompassTate & Lyle
Price-to-book (P/B) ratio4.23.4
Net gearing (%)3351

Source: Digital Look. Winners in bold.

Round three ends all square with one point a-piece. At the end of the contest, Tate has won two rounds and one round has finished in a draw. The overall points tally is Tate seven and Compass five.

Post-match assessment

This was a bit of a closer contest than the bare scoreline suggests, as it was essentially decided by Tate's superior operating margin and narrowly better dividend cover.

However, Tate did take all five of the valuation-ratio points I use in these head-to-head contests -- historic and forecast P/E, historic and forecast dividend yield and P/B -- giving it better 'value' credentials than Compass at their present share prices.

Against that, supporters of Compass can point to the caterer's much superior earnings and dividend growth -- both historic and forecast -- which certainly adds another important ingredient into the mix.

Overall, I'd say there isn't too much to choose between these two companies. However, as their P/Es are not particularly generous compared with the market average and their yields are also a little on the stingy side, you may find both shares trading on a more appealing rating at some point in the future.

One investor who has mastered the art of patience is top City investor Neil Woodford. Woodford has thrashed the market over the past 15 years by waiting for opportunities to invest in dividend-paying, blue-chip companies when they are on attractive valuations.

If you're interested in investing in blue-chip dividend powerhouses, you can help yourself to a free and exclusive Motley Fool report where you'll learn about Woodford's enormously successful strategy and eight of the companies he currently favours. This free report is available for a limited time only, but it can be in your inbox in seconds: simply click here.

> G A Chester does not own shares in any of the companies mentioned in this article.

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