One day I suspect someone will write a management study about sucralose as the definitive way not to launch a new product. Discovered by accident in 1976, this super-sweetener has been the main talking point for Tate & Lyle watchers for the past two years. It was cleared for use in various developed markets in the 1990s, but this took longer than expected; in 2006 the patent expired, the Chinese brought their own knock-offs to the market and the price fell.
Tate had to retrench, cut capacity and move production to one plant in Alabama. The good news is that the restructuring is a year ahead of schedule, and profits of £22 million in the year to March 31 can be repeated or even exceeded this year on that lower output.
The bad news is that sucralose did not turn out to be the game changer the company expected it to be, though soft drinks manufacturers are still adopting it.
Tate has restructured elsewhere. Most assets in Eaststarch, a joint venture, were sold. Efficiencies in the supply chain were introduced. Tate is focused more on its higher margin speciality food ingredients side, which includes sucralose, where profits rose by 10 per cent and margins were 120 basis points higher, with growth in markets such as Asia Pacific and Europe, the Middle East and Africa.
The bulk ingredients side, which supplies corn syrup to soft drinks makers, is not growing and is being run for stability and cash with long-term contracts covering much of the output. Tate is a difficult business to understand because there are so many moving parts. However, restructuring has come in under cost and the company has set itself some ambitious targets.
Under one of those five-year plans loved by chief executives, Tate expects to get 70 per cent of profits by 2020 from speciality food ingredients, with 30 per cent of sales from Asia Pacific. It also wants $200 million of sales from new products. That should take care of growth, provided there are no slip-ups.
The full-year dividend has been held at 28p. Through what has been a difficult year or more, the shares, up 10p at 624p, have had the support of a dividend yield that is 4.5 per cent. That is a good enough reason to hold them long term.
MY ADVICE Buy
WHY The management have set some challenging targets for 2020, while the dividend yield makes these worth waiting for
United Utilities
United Utilities is the last of the three quoted water companies to report results this week and, though its dividend rise is in the middle of the pack, the yield on the shares is just ahead of the rest.
A 2 per cent rise to 38.45p, in line with the usual promise of inflation-plus, and a 10p fall in the share price to 955p suggests a yield of 4 per cent.
This leaves the investor with an interesting choice. Take out Severn Trent, whose yield at 3.5 per cent is the lowest of the lot, and UU just about nudges ahead of Pennon, owner of South West Water.
As I suggested yesterday, Pennon has a fast-growing waste management and energy side and is probably best for those who would seek some capital gain.
UU is for those who want a guaranteed income, with almost no downside. The regulator’s ruling covering last financial year and the next four meant a fall in profits because of lower bills. This was offset, though, by savings on finance charges because much of its debt is in inflation-linked bonds and benefiting from almost non-existent inflation.
Worth having if that yield suits your investment criteria.
MY ADVICE Hold
WHY The dividend yield is just about best in sector
Paypoint
PayPoint prefers to describe the year to the end of March as “challenging”. And how. The company was once a go-go growth stock that made its money from providing terminals in shops that allowed people to pay their utility bills, expanding into mobile and online payments, and a delivery service with Yodl. There was also a small payment terminals business in Romania. The company had cash in the bank; the only question was how fast it could deploy it.
Move forward a year or so and the online business has been sold at a loss and the mobile one will be sold, after a £30.8 million write-down, both having failed to cope with heavy competition. The company is in dispute with Yodl over the future of that joint venture. The warm weather has cut the amount people are spending on their energy bills and the Competition and Markets Authority is trying to cut the costs of energy pre-payment. Oh, and there was an adverse tax ruling costing £2 million.
Revenues and profits came in flat, ahead of write-downs, with an underlying growth rate of 4 per cent. The company is paying a 21p one-off return from the online sale, with another when mobile goes. It is focused on those terminals and another product that helps utilities bill customers. The year’s dividend is raised by 10 per cent to 42.4p and there is a 37p special over each of the next five years. Combine the two and the yield on the shares, up 32½p at 906½p, approaches 9 per cent. The uncertainties would seem to discourage a purchase, though.
MY ADVICE Avoid
WHY Yield is huge, but hard to see what lies ahead
And finally...
Marshall Motor’s flotation on AIM last spring, at 149p, could easily have been overlooked. The deal it announced yesterday is less easy to ignore. The company is paying £106.9 million for Ridgeway Garages. This is almost equal to its market capitalisation before the deal and is being funded entirely from its existing resources. “Audacious” is how one analyst describes it; Marshall now moves from being the tenth to the seventh biggest UK franchise motor dealer and the shares were ahead by 24 per cent.
