A large portion of the British public may have to wave goodbye to their treasured pint and pub lunch of hormone-free beef and non-GMO vegetables. Boris Johnson's recent ascension to 10 Downing Street has made the prospect of a post-Brexit trade deal between the U.S. and the U.K. likely, which portends the removal of EU-imposed food standards and a hungry market for US exporters.
The Trump administration's determination to corner the British market could triumph considering the mutual admiration between the two nation's leaders. US policymakers plan to "eliminate practices that unfairly decrease U.S. market access opportunities or distort agricultural markets to the detriment of the United States."
The U.K. has so far resisted cheaper food imports from the U.S. because of E.U. standards that preclude products such as chlorinated chicken and hormone-fed beef. However, with right-leaning Boris Johnson now managing Brexit negotiations, US food manufacturers are poised to offer cheap food products to the U.K. who may otherwise face prices inflated by high WTO tariffs and possible food shortages post-Brexit.
Tyson Foods is one leading U.S. food producer preparing for a euro invasion and ready to ride the waves to the White Cliffs of Dover. Here's why.
Tyson's strong position
Tyson claimed to be well positioned for future growth in June citing its diversified portfolio, new products, and expansion into global markets. Tyson's claim is substantiated by historical steady growth with total shareholder return of 695% over the past 10 fiscal years compared to a 328% return of the S&P 500 during the same timeframe.
Growth has recently been aided by a global shortage of pork after the African Swine Fever outbreak, which is predicted to halve China's pig herd by the end of 2019, according to Reuters and Dutch bank Rabobank forecasts. This catastrophe stands to only boost Tyson's sales further.
The company expects 98% of protein consumption growth to occur outside the U.S., and Tyson is positioning itself to take advantage. Beef in general has shown an increase in demand as the economy has boosted global middle-class incomes, aiding Tyson's bottom line. Also, Tyson is extending its product lines with, for example, Tyson Air Fried chicken and the newly acquired Smart Chicken.
In response to the global demand for alternative proteins, Tyson has announced its first plant-based and blended products under its New Raised & Rooted® brand. President and CEO of Tyson Foods Noel White said in a recent press release, "[We] expect to be a market leader in alternative protein, which is experiencing double-digit growth and could someday be a billion-dollar business for our company."
But perhaps most tellingly, Tyson has this year acquired Thai and European businesses from BRF S.A. The purchase includes production facilities in Thailand, the Netherlands, and the U.K. All this investment, however, begs the question: Is Tyson's growth sustainable?
Such vibrant activity in the last six months to a year could have investors nervous, particularly when both the United States and the United Kingdom have such unpredictable leaders at the helm. But Tyson Foods has been smart here too.
The company's dividend yield is not high at 1.9%; it has been steadily increasing since the mid-2000s, and the company bought back stock over the last year at the rate of 1% of the company's market cap or approximately $250 million (Tyson Food's market cap ranged from around $20 to $29 billion). The company is reinvesting in itself while making sure it can continue to meet its obligations to shareholders. As far as cashflow is concerned, 33% of free cashflow generated was paid out as dividends, which implies sustainable payouts.
Looking at the company's debt load, Tyson Foods has net debt of 2.93 times its EBITDA, which is not alarming, particularly as it reflects a sensible increase in risk since October 2018 and worthwhile expenditures considering the favorable environmental and market conditions. Overall, Tyson Foods seems to be making some wise long-term strategic decisions while showing a strong ability to bare the risk.
Where do we go from here?
While Tyson Foods and other U.S. food producers are salivating at the thought of a trade deal with the U.K., the Brits are rapidly losing their appetite. Post-Brexit, if US food standards become the norm, the Brits may have to take the ferry over to France to find a culinary experience that meets the standards they are used to.
Pub lunch at the King's Head anyone?