Investing in Tate & Lyle can be a profoundly frustrating experience. As soon as the shares head above £8, something happens beyond the company’s control to push them back down again. They were there in mid-2013, before the impact of cheap Chinese competition for sucralose, the company’s long-awaited artificial sweetener.
The results to March 31 show that sucralose is finally providing the sort of contribution to profits that the board had long dreamed of, though the £52 million operating profit was swollen by a £15 million one-off from the release of excess stocks from the closure of a factory in Singapore.
The shares edged back above that £8 ceiling in early November. Then the world woke up to discover that Donald Trump was the US president and they lost almost a quid in a day. The reason was the uncertainty over the North American Free Trade Agreement and concern over curbs on Tate’s cross-border business with Mexican soft drink producers. This is entirely theoretical but it remains a negative.
Through all this the company has plugged away with its policy of using its bulk ingredients side, which produces cash but whose performance can be erratic, to fund investment in speciality food ingredients, more high-margin products that go to a range of producers. The figures show that, apart from a few weak spots, Tate is in good health.
Yet the best performance came from bulk ingredients, partly through better execution and partly because the markets were favourable, in terms of the balance of supply and demand for corn syrup, which allowed a favourable round of contract negotiations with the big drinks manufacturers.
Speciality foods did well enough in emerging markets but US growth was held back by low demand for food and drinks. Tate is heavily dependent on the big manufacturers that are suffering the most.
On a positive note, sales of new products, where the growth will come from, were above the $100 million mark for the first time. The shares have been held up by a decent dividend yield but, approaching £8 again before they lost 41p to 749p, that yield is less impressive. On 16 times’ earnings they look up with events.
My advice Avoid
Why The share price performance has been erratic. The company is well tuned for growth but uncertainties over US policy remain
United Utilities
One trusts Ofwat, the water regulator, is paying close attention to the dividends being awarded by the three quoted companies in the sector as the preliminary negotiations begin on the new five-year regulatory round that starts in spring 2020. United Utilities was the last to report, with a 1.1 per cent rise in the full-year dividend for the year to the end of March and a pledge to increase this by at least the rate of inflation.
This might seem a bit mean; Severn Trent, the closest equivalent, has shifted upwards to a promise to raise payments by RPI plus 4 per cent, matching the pledge by Pennon, owner of South West Water. This is a little different because a third of the group is Viridor, the waste management side, which offers the chance of faster growth.
Shares in the three have shot ahead this year. United Utilities’ have gained 17 per cent, and this has dragged down the once attractive dividend yields. United Utilities now offers 3.7 per cent, on a historic basis, and Severn Trent 3.2 per cent, though this will rise because of that raised dividend promise. Pennon, at 3.8 per cent, is the highest, but none is a raging buy.
My advice Hold
Why Share price rise has depressed yields in sector
Paypoint
There are so many moving parts around Paypoint that it is sometimes difficult to work out the general direction of travel. The company is a former stock market high flier that went into too many areas, including mobile and online payment of bills, and had to exit. This left hefty write-offs but a legacy of extra cash that could be returned to investors as dividends.
It also left three businesses, one providing terminals in shops to allow utilities customers to pay bills, a similar operation in Romania which is growing fast, and a joint venture with Yodel, the home delivery company. Again, there are moving parts heading in different directions. The core retail networks side had flattish profits in the year to end-March because though the latest generation of terminals are being rolled out fast enough, people are for some reason paying their bills less often and Paypoint gets paid for each transaction.
Add to that the suspension of a payment scheme through the Department for Work and Pensions. Add in, again, the renegotiation just before Christmas of that contract with Yodel, which will allow other delivery firms to be signed up but means £3 million off the bottom line over the next two years, offset by higher revenues from those new customers. The result is that the current year will be flattish again, though you have to pity the analysts who have to come up with detailed numbers. This year’s dividend suggests a yield well above 8 per cent but the shares, off 27½p at 959½p, may struggle to make progress.
My advice Avoid
Why It is hard to take a view on immediate progress
And finally . . .
Caledonia Investments, which dates to the Cayzer shipping family in Victorian times, has joined the half-century club. This is made up of investment companies that have increased dividends for 50 years, and Caledonia is the fourth new entrant this year. The fund has raised its full-year dividend by 4.2 per cent to 54.8p. There is in addition a £1 special dividend paid for out of successful disposals in the year, including £197 million from the sale of Park Holidays, the caravan park operator, at the second attempt in December.
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