In an economic downturn, investors turn to defensive stocks or those that possess a significant moat. I believe certain food production companies possess defensive qualities and therefore are good buys during a market crash.
One of the byproducts of the current economic downturn has been the increased demand for food products. Tate & Lyle (LSE:TATE) is a defensive stock I like the look of, even more so with the announcement of its full-year results.
Defensive stock qualities
Consumer staples such as food items are essential for everyday use. Food items are the types which households are unwilling or unable to eliminate from their budgets even in times of financial trouble. As a defensive stock, Tate & Lyle has continued to trade well despite the current economic situation.
TATE originally started as a sugar refining business in the 1920s. It began to diversify its product range in the 1970s. Its primary focus now lies in producing bulk ingredients for food manufacturers. It is also the exclusive UK producer of Splenda artificial sweetener.
Results and performance
Tate & Lyle has decided to maintain its final dividend, which is positive news for shareholders and potential investors alike. In addition, it reported favourable results in its full-year report released at the end of last week. TATE confirmed March showed limited impact from the pandemic while April showed significant changes in demand patterns.
In the year to 31 March, revenue rose 2% to £2.8bn while profit before tax was up 4% to £331m. TATE’s dividend for the year rose by 0.7% to 29.6p after the maintained final payment. Its free cash flow was up £35m compared to the previous year.
Aside from the good results, TATE confirmed that in order to increase liquidity it will be freezing all discretionary salary increases and non-essential spending, as well as halting recruitment. None of its employees have been furloughed and no government aid has been sought so far. In my opinion these are shrewd steps to ensure the business is protected in the current downturn.
Sweeter than sweet
I think this is a great defensive stock. TATE’s share price is down nearly 20% due to the market crash, which means shares can be picked up cheap. Its price-to-earnings ratio of close to 12 means it will recover sooner rather than later, so now may be an opportune time to pick up shares cheaper than usual.
As well as the current cheap share price, TATE has just reported great full-year results. It has taken the necessary steps to protect itself from the market downturn. TATE currently has nearly £1bn in liquidity through cash on hand and an undrawn rotating credit facility.
Past performance is also positive for the food manufacturer. Revenue and dividend per share have increased for the past three years. Profit has been over £200m in the previous three years too.
If you add to all these compelling facts, a dividend yield of over 4%, what’s not to like? This would sit firmly in my buy and hold category of investments.