What I’d buy instead of this more-than-4%-yielding FTSE 250 share

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Over the past five years, food ingredients producer Tate & Lyle (LSE: TATE) has seen its revenue decline almost 17%, earnings per share rise 4.5%, operating cash flow move 15% higher, and its directors  nudge the dividend up 9.5%.

To me, that’s an underwhelming outcome that makes me question whether it’s worth taking on the risk of investing in the firm, even though the forward dividend yield is running at around 4.4%, which looks attractive at first glance.

Low expectations

I reckon the company should be growing more than it is in the current economic environment because I think there’s a fair bit of cyclicality in the firm’s operations. That’s certainly what the share-price chart suggests when you look at the dips and plunges over the years. Indeed, City analysts watching the company are predicting broadly flat earnings out to March 2020.

Today’s half-year report shows adjusted revenue 2% higher than the equivalent period last year and adjusted diluted earnings per share up 5%. Net debt fell 14% to £337m, but I’d like to see much brisker trading and the company paying down bigger chunks of its borrowings in what should be the good times for trading right now. The directors pushed up the interim dividend by 2.4%.

Chief executive Nick Hampton said in the report that the firm performed in line” with the directors’ expectations, despite cost inflation from materials and transport in North America, and lower profits in its commodities division. Meanwhile, the firm aims to stimulate growth in its business with three programmes it announced in May to “sharpen the focus on our customers, accelerate portfolio development and simplify the business.” Hampton said the initiatives are progressing well.

Where’s the attraction?

But there’s nothing much to latch onto that makes me become excited about the stock, or the firm’s potential. There’s no fast-growing division, no amazing new product in development, and no recent acquisition that will transform the prospects of the business. I think holding the shares would expose me to all the downside risks you get when you hold shares in an individual company, but without rising earnings or a compelling upside case to balance those risks.

So I’d rather invest in the market itself than in Tate & Lyle by buying into a passive, low-cost index-tracking fund that automatically reinvests dividends back in. I could invest in a fund that aims to replicate the returns of the FTSE All Share Index, but my preferred option is to invest in a tracker that follows the FTSE 100 index. I’m bullish on the prospects of the FTSE 100 and if I invest in a tracker fund, my money will automatically be spread across 100 companies, which would iron out the risk I’d face by investing in just one firm such as Tate & Lyle.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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