Will shares in Tate & Lyle PLC (LON:TATE) help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Tate & Lyle (LSE: TATE) (NASDAQOTH: TATYY.US), the 138-year old sweetener and ingredients business.
Tate & Lyle vs. FTSE 100
Let's start with a look at how Tate & Lyle has performed against the FTSE 100 over the last 10 years:
|Total Returns||2008||2009||2010||2011||2012||10 yr trailing avg|
|Tate & Lyle||-4.8%||13.7%||25.0%||40.6%||11.7%||13.8%|
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Tate & Lyle's 10-year average total returns are comfortably ahead of those provided by the FTSE 100, without looking unsustainable. It's a good start for a retirement share.
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Tate & Lyle shapes up:
|5 year average financials|
Here's how I've scored Tate & Lyle on each of these criteria:
|Longevity||A proper British blue chip with a long pedigree.||5/5|
|Performance vs. FTSE||It's stayed ahead of the FTSE 100.||4/5|
|Financial strength||Healthy margins and falling debts.||4/5|
|EPS growth||Strong earnings growth.||4/5|
|Dividend growth||Modest growth and yield, but a reliable payer.||3/5|
Sugar, sweeteners and other food ingredients may not be sexy, but they are reliable, as Tate & Lyle's 135-year history testifies. The company sold its sugar operations in 2010, but the bigger part of its business remains, supplying sweeteners and other ingredients to the food industry.
Tate & Lyle is split into two divisions: specialty ingredients and bulk ingredients. Tate's specialty ingredients division is responsible for around 55% of the company's operating profits and manufactures products where Tate has some kind of proprietary advantage that enables it to make a unique product at a premium price. The bulk ingredients division produces commodity-type products such as high-fructose corn syrup, industrial starches and ethanol.
Historically, bulk ingredients account for around 45% of Tate's operating profits, while speciality ingredients account for the remaining 55%. The company's strategy is to focus on growing its specialty business, while using the bulk ingredients business to generate cash. In the long term, I think this strategy should work well, increasing Tate's economic moat and reducing its dependency on the lower-margin bulk ingredients business, which is highly competitive.
Tate & Lyle's score of 20/25 suggests that it is a solid choice for a retirement share, and I agree. Although its dividend yield is only in line with the FTSE 100 average, Tate's dividend has a reasonably good growth record, with only one cut in the last twenty years.
Tate's financial year ends in March, and the company's most recent trading update suggested that profits may fall slightly this year. The firm's shares currently trade on a slightly ambitious forward price to earnings ratio of 15, but the share price may well dip if the results are poor, providing a good buying opportunity at an improved dividend yield.
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> Roland does not own shares in Tate & Lyle.