If you’re investing in shares to help fund your retirement, then I believe dividend income is an important requirement. I’d also suggest that you want to look for businesses that will carry on performing reliably for many years. That’s certainly what I’m aiming for.
Today I want to look at two stocks which I think should provide reliable dividends and growth for the foreseeable future.
An essential ingredient?
Tate & Lyle (LSE: TATE) is a familiar brand, but the Tate & Lyle-branded products you buy at the supermarket are probably made by American Sugar Refining, which bought Tate’s European sugar business in 2010.
Although the company does still produce some bulk ingredients, such as starch and corn fructose syrup, its main growth focus is specialist ingredients used by food producers.
Many of these products are used by major food brands. They are generally harder to substitute with cheaper alternatives than commodity-type ingredients like granulated sugar. This makes them more profitable.
Another very profitable area of the group’s business is its Sucralose sweetener division, whose main brand is Splenda.
Long-term opportunity
I’ve pulled some numbers from last year’s results so you can see how the group’s profit margins vary across its business:
|
Division |
Adjusted operating profit |
Adjusted operating profit margin |
|
Food & Beverage Solutions (speciality ingredients) |
£137m |
16.1% |
|
Sucralose (e.g. Splenda) |
£55m |
37.6% |
|
Bulk ingredients (e.g. starches) |
£166m |
9.7% |
In my view, this points to a long-term opportunity. Higher profit margins in the speciality ingredients and Sucralose businesses mean that if sales rise, profits will rise more quickly than they would from bulk ingredients sales.
Even if that doesn’t happen, I think Tate & Lyle has the qualities needed for a long-term investment. The group hasn’t cut its dividend for 21 years. Profits margins are fairly stable and cash generation is good, with only a limited amount of debt.
The stock also looks affordable to me, on 14 times 2019 earnings with a 4.2% dividend yield. I’d be happy to buy these shares today and never trade them again.
We can’t get enough
My second pick also comes from the food industry, which I see as a good defensive option for the long term. After all, whatever else happens, we can’t stop eating.
And it seems that one food we can’t get enough of is meat. Hilton Food Group (LSE: HFG) specialises in producing meat products for supermarket chains in the UK and other developed markets.
Hilton’s share price has risen by 80% over the last five years and by 430% since its flotation in 2007. Over the last five years, sales have risen by 50%, while pre-tax profits have risen by 72%.
More to come?
Management isn’t stopping there. The last two years have seen significant investment in the business. The acquisition of seafood supplier Seachill helped to expand the group’s product range into new markets. Meanwhile, new plants are expected to open in New Zealand and Australia in 2019 and 2020, supporting further growth.
One risk for investors is that most of the group’s sales come from just a handful of big customers. The shares aren’t cheap either. As I write, they trade on 21 times 2019 forecast earnings and offer a dividend yield of just 2.4%.
However, I see this as a good business that’s well run. For long-term investors, I think this could be a fair price to pay.
