Should I Invest in Tate & Lyle?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators, and buy at prices that offer decent value.

This series aims to identify appealing FTSE 100 investment opportunities, and today, I'm looking at Tate & Lyle (LSE: TATE  ) , which describes itself as a global provider of ingredients and solutions to the food, beverage, and other industries.

With the shares at 837p, Tate & Lyles's market cap. is £3,907 million.

This table summarises the firm's recent financial record:

Year to March 2008 2009 2010 2011 2012
Revenue (£m) 2,867 3,553 2,533 2,720 3,088
Net cash from operations (£m) 0 501 587 145 231
Adjusted earnings per share 35p 38.2p 39.1p 46.5p 57.5p
Dividend per share 22.6p 22.9p 22.9p 23.7p 24.9p

Tate & Lyle is a brand that many Brits grew up with, and may recently know for its consumer products such as Splenda and Lyle's Golden Syrup. However, the firm also generates around 75% of revenue from supplying additives for the food and beverage manufacturing sector, mainly by the process of corn wet milling and the production of high-intensity sweeteners.

Tate divides its operations into two divisions: Speciality Food Ingredients delivered 60% of operating profit last year, and Bulk Ingredients provided 40%.

In recent news, the company said that it is expecting operating profits to come in flat compared to last year in the Speciality division, with a similar outcome expected in the Bulk division, due to factors like a challenging U.S. ethanol environment, and tight corn supplies in the U.S. and Europe. However, demand for liquid sweeteners and starches has been holding up in the U.S. and Europe, which could presage a steady total-return performance going forward.

Tate & Lyle's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

  1. Dividend cover: Adjusted earnings covered last year's dividend around 2.3 times. 4/5
  2. Borrowings: Net gearing is around 40%, with net debt just over last year's earnings. 4/5
  3. Growth: Revenue and earnings have been growing recently, with lumpy cash flow. 4/5
  4. Price to earnings: A forward 14 looks up with growth and yield expectations. 2/5
  5. Outlook: Satisfactory recent trading and a cautiously optimistic outlook. 3/5

Overall, I score Tate & Lyle 17 out of 25, which inclines me to be ambivalent about the firm's potential to outpace the wider market's total return going forward.

Foolish Summary
Borrowings seem under control, and there is decent dividend cover. However, Tate's cash flow seems lumpy, and the outlook is insufficiently robust to excite me at the current valuation. So, I'm not going to invest in Tate & Lyle right now.

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