Royal Mail

Royal Mail (LSE:RMG) is currently trading at a 36% discount versus three months ago. Moreover, at 331p, the current price is massively down on last summer’s 600p.

But beyond the obvious upside potential, I believe Royal Mail will grow strongly in the future. The pandemic forced the London-headquartered firm to put parcels at the heart of its operations. Royal Mail has seen a massive increase in the number of parcels being posted through its service. This should help the group transform its revenue.

Moreover, just a few years ago, it was sorting the majority of parcels by hand. This was eating into the firm’s margins. But this year, that figure is expected to be half, representing a considerable change. I think there’s plenty of upside here and will be buying Royal Mail shortly.

Rising inflation, leading to higher wages, is one risk for this stock. Wages are one of the firm’s main costs, and wage inflation could be exacerbated by a strong union.

Crest Nicholson

Housebuilder Crest-Nicholson (LSE:CRST) returned to pre-tax profit in 2021 after a tough pandemic. While performance figures are still down on a few years ago, the company has made strategic changes to reposition the business.

In January, Crest said 2022 should be less volatile that previous years, noting that 63% of revenue for the financial year was already covered. They also suggested that the new leadership team had established a strong footing for future growth.

The stock is current trading around 276p a share. That’s massively down from just five years ago when the company’s share price exceeded £6. Like many housebuilders, the share price has continued to fall despite the positive performance data.

However, the impact of interest rate rises on demand for new homes, cladding repayments and inflation represent ongoing risks for the business. These have all weighed on its share price.

I own shares in Crest and will continue to hold.

Tate & Lyle

Tate & Lyle (LSE:TATE) isn’t exactly a beaten-up share, but there are promising signs for this food ingredients business. The group now focuses on products like sweeteners, thickeners and bulk commodities, having let go of its sugar brand.

It has sought to transform itself, selling off less profitable parts of the organisation. Instead, the company is focusing on higher-growth areas. The parts of the business sold off have been holding back the company’s margins. Without them, Tate & Lyle’s operating margins rise from 11.1% to 14.8%.

The stock is currently trading around 736p a share, down from highs of over 800p. It is also offering an attractive 4.17% dividend yield. Moreover, £500m of the £900m made by shedding less profitable units has been earmarked for shareholders.

One issue is that the firm’s dividend yield is not as well covered by earnings as I’d like. The dividend coverage ratio in 2021 was 1.77.

Branded luxury goods

Branded luxury goods company Burberry CLSE: BRBY) sells its products around the world.

And it does so online and via stores, outlets, concessions and franchisees in department stores. On top of that, the business licenses the manufacture and distribution of some products bearing the Burberry trademark to third parties.

There’s been some financial progress over the past few years. Since 2016, net profit has delivered average growth of just under 4% a year. And the compound annual growth rate of operating cash flow is running just below 10%.

The directors have been pushing up the shareholder dividend a little each year to reflect the progress. And the only blip in the recent dividend record occurred in 2020 when coronavirus caused a reduction. Nevertheless, the dividend has been growing at an average of just under 3% a year.

Burberry headed its third-quarter trading statement in January with the statement “momentum builds”. And the directors said full-price sales grew at a double-digit percentage compared with two years previously, before the pandemic arrived. And the directors reckon the firm is making progress attracting new, younger customers to the brand.

The outlook is positive. And City analysts expect earnings to advance by just under 12% in the trading year to March 2023. Meanwhile, with the share price near 1,951p, the forward-looking price-to-earnings ratio is around 19 when set against that forecast.

The valuation isn’t ‘bargain basement’. And that adds some risk for investors because the business could miss its forecasts causing the share price to fall. However, growth is on the agenda, the brand is strong and the company has a strong balance sheet. I like this one right now.

Food ingredients

Food ingredients company Tate & Lyle (LSE: TATE) delivered an upbeat third-quarter trading update in February. And today I’m looking at the business at an exciting point in its development.

The firm is on track to complete the separation of its operations into two businesses at the end of March. One will be Tate & Lyle focused on food and beverage solutions. And the other will be ‘NewCo’ specialising in plant-based products for the food and industrial markets.

Tate & Lyle will joint-own NewCo with a company called KPS Capital partners. And TATE expects to earn gross cash proceeds of around $1.3bn from the deal. After that, it will likely benefit from a stream of dividends generated from its 50% stake in the new enterprise.  

Chief executive Nick Hampton said Tate & Lyle has re-positioned itself as a “growth-focused”, global food and beverage solutions business serving “faster growing” markets. And he sees “significant” opportunities ahead. 

However, City analysts’ estimate lacklustre growth in earnings next year. And there is some risk the company could fall short of its ambitions. If that happens, the forward-looking earnings multiple running near 17 could become problematic and the share price could fall.

Nevertheless, the balance sheet is strong. And I’d be prepared to embrace the risks and hold the stock while the company aims for growth ahead.

• Both of these FTSE 250 businesses demonstrate strong and consistent growth in revenue and profits
• Tate & Lyle will pay a special dividend after the imminent sale of its Americas primary products business
• Plus500 is launching a $55m share buyback scheme 

The FTSE 250 is an index full of exciting companies with strong growth prospects. I think I’ve found two firms that could perform as part of a portfolio geared up for the long term. While Tate & Lyle (LSE: TATE) has a record of results indicating constant growth, PLUS500 (LSE: PLUS) has just confirmed a share buyback scheme. Why should I add these two businesses to my portfolio? Let’s take a closer look. 

A food and beverage heavyweight

Tate & Lyle, a supplier of ingredients to the food and beverage industry, has delivered growth over the past five fiscal years. Revenue has grown — albeit only slightly — from £2.7bn to £2.8bn, and while this is far from heart-stopping, it is remarkably consistent.

What’s more, the firm is dependable regarding profitability too. Over the same period, profits before tax rose from £233m to £283m. Again, this is very consistent. Earnings per share (EPS) have also grown, boasting a compounding annual growth rate of 2.6%. These steady gains are exactly what I’m looking for in my long-term portfolio.

In a recent trading update for the three months to 31 December 2021, Tate & Lyle confirmed it was trading in line with expectations, but that the discontinued bulk sweetener and industrial starch segments were “significantly weaker”. In spite of this, revenue from continuing operations was up 18% compared to the same period of the previous year.

Furthermore, the firm will pay a special dividend of £500m after the imminent sale of stakes in its primary products business in the Americas. This is due in March 2022.      

A FTSE 250 trading platform

Plus500 is a trading platform that enables customers to trade contracts-for-difference (CFDs) on over 2,500 financial instruments. Company revenue increased over 64% to $718m between calendar years 2017 and 2021. During this period, profits have also grown over 50%.

In the firm’s preliminary results, for the year to the 31 December 2021, active customers fell 6%. Furthermore, revenue was down 18% year-on-year. This is actually indicative of the unprecedented growth the company enjoyed during the pandemic and on a two-year basis, revenue was still up 103%. 

Furthermore, PLUS500 announced a new share buyback scheme of $55m. In essence, this means the business is repurchasing some of its stock. This is a way for the company to return cash to shareholders. I view this development with some optimism, because it suggests the firm is in a strong financial position. 

Both of these companies display strong growth in their results and could be great additions to my portfolio. With a view to holding for the long term, I am encouraged by the special dividend and share buyback schemes. I will be buying shares in both firms without delay.

Sweet as sugar

The first one is Tate & Lyle (LSE:TATE). The FTSE 250 food producer currently has a dividend yield of 4.8%. Over the past year, the share price is down 1%.

The company has done well financially, shown in the H1 results released last month. When excluding the discontinued operations, revenue was up 19% and profit before tax was up 20% on the same period last year. 

What appeals to me about the dividend stock is the robustness of performance within the main food and beverage division. Its core ingredients, such as sweeteners, are good base materials for a variety of uses for consumers. Therefore, even if we do see a recession in the UK, I wouldn’t expect demand to fall that much.

In terms of risks, the business is going through a transformation. It’s discontinuing some operations in North and Latin America. I think this could be a good thing in the long term, but a smooth transition with offloading businesses is never easy. This makes it a risk in the immediate term.

An alternative banking dividend stock

When most people look for a dividend stock within the banking space, many choose the FTSE 100 heavyweights. However, there are others that I think sneak under the radar. For example, Investec (LSE:INVP). The Anglo-African bank has a dividend yield of 4.84% and has seen its share price double in the past year.

I think the bank is a recession-hardy option for a couple of reasons. Firstly, it isn’t just concentrated on business in the UK. In the H1 2021 results, the South African arm made adjusted operating profit of £191.9m, contrasting to the UK and other markets at £133.8m. Therefore, if we get a recession in the UK, the business can try to offset this revenue hit from other areas.

Secondly, the banking space has been. able to cope with a pandemic hit. Although it offered short-term pain last year, most banks have bounced back really well. Therefore, I think investors will note this should we see a similar Covid-19-induced crash again.

One point that is worth noting is that I’m not entirely comfortable taking on exposure to South Africa. Although it acts as a good diversifier for revenue, the political and social unrest is something of a concern to me.

Overall though, I’m considering buying the shares of both companies mentioned above. I think the dividend stocks can offer me good income, even if we do see another recession in the UK.

There are exceptions to the rule, however. Some FTSE 250 stocks offer comfortably over 4% dividend yields right now. The 4% level is important to me, because this is the going rate of inflation. In fact, the UK government expects inflation to average 4% in the next year as well. And I would like to earn a positive real return, which is just not possible with a passive income below this rate.

Tate & Lyle: FTSE 250 stock with 4.6% dividend yield

One FTSE 250 stock I like with relatively high dividend yield at 4.6% is Tate & Lyle (LSE: TATE). The food ingredients’ supplier has been consistently profitable for a while, which gives me encouragement that its dividends could continue. It even increased its interim dividend by 2.3% earlier this month. But there are two aspects that I am watching out for. 

The first is, that it is splitting its business into two parts. One of these will retain the original name and focus on food and beverage solutions in speciality markets. The other one will focus on plant-based products in food and industrial markets. While this may just turn out to be a positive for the company, I would look out for how things proceed. 

Next, the company’s share price has been falling since earlier this year. It has almost wiped out all gains made in last year’s rally following the development of Covid-19 vaccines. At the same time, it is profitable and pays good dividends. It could be undervalued right now, which is why it is attractive to me as an income stock to buy for my portfolio. 

Greencoat UK Wind: 5.3% yield for the renewable energy stock

The next FTSE 250 stock I like is the renewable energy fund, Greencoat UK Wind (LSE: UKW), which has an even higher dividend yield of 5.3%. The company, which invests in wind farms, has returned an average dividend yield of 5.2% over the past five years, which is an encouraging sign from the word go. It has also been consistently profitable, even though the profit amounts have fluctuated, which is more positive than not. 

Its share price has not gone anywhere since the pandemic happened, but I reckon that can change. Green growth is big on policy agendas not just in the UK but also globally. So, even though renewable energy stocks like this one are doing just about ok for now, I reckon that they can do much better over the next decade as the sector matures. And in the meantime, I earn 5%+ dividend yields from the stock. What is there for me to lose? I’d buy the stock now.

High passive income options

Two companies that operate in the same area are CMC Markets (LSE:CMCX) and Plus500 (LSE:PLUS). Both are retail trading and investment platforms. They offer a range of services across the investing spectrum. For example, spread betting is a leveraged way of buying or selling stocks, FX, and other instruments. This is a high-risk way of trading, but with potentially high rewards. 

During the pandemic, the volatility in financial markets saw a surge in account openings and trading activity for both companies. Money is made by taking a small spread off each transaction. So the more that clients trade, the more profitable it is for CMC and Plus500.

As a result, both companies were able to pay generous dividends out of the profits during this period. In terms of passive income, both FTSE 250 stocks have a dividend yield above 6%. This puts both within the top 10 highest yielding stocks within the index.

The risk here is that both companies need to adapt to keep the growth going. If retail participation slows, they need to be able to generate revenue from other sources, such as ISAs, more crypto offerings, and other services. The client base that has been generated is golden, but these companies need to ensure clients remain active, otherwise revenue will dry up during quieter times.

Defensive FTSE 250 stocks

Another area within the FTSE 250 for passive income ideas is within consumer staples, for example, PZ Cussons (LSE:PZC) and Tate & Lyle (LSE:TATE). PZ Cussons owns brands such as Carex and Imperial Leather. Tate and Lyle is a well-known sugar supplier.

Both companies should continue to offer me good dividends into the future. By nature of the products sold, customer demand should remain constant irrespective of what happens to the UK economy in the coming year. I say this because there are concerns about the negative impact of the current political situation, Brexit issues, high inflation, and so on.

Even if all of these things blow up, I’ll still need to buy sugar and soap! This is one reason why I’m happy to consider buying shares in both FTSE 250 stocks.

The risk here is that supply chain disruption could hamper stock levels even if demand is present. In fact, in a recent result presentation, Tate & Lyle noted that sweeteners and starches profit was down 13% “due to cost inflation and operational and supply chain disruption”. If this continues, then it could hamper future dividend payments.

Ideas for right now

Overall, I’m considering buying shares in all four of these passive income ideas. The FTSE 250 stocks offer me alternatives to the main index, and I think there’s good value to be had.

FTSE 250 bargains

The first company on my list is the buy-to-let specialist lender OSB Group (LSE: OSB). Thanks to the growing demand for financial products, the company reported in August that pre-tax profits for the first half of its financial year more than doubled. Based on this growth, City analysts believe the stock is trading at a forward price-to-earnings (P/E) multiple of just 6.4. 

As well as this attractive valuation, shares in OSB support a dividend yield of 4.2%. 

As the country continues to recover from the pandemic, I think challenger banks like OSB should see a strong recovery in earnings and sales. That is why I would snap up shares in the lender today while they are trading at a discount multiple. 

As we advance, the group may face risks, including higher costs and competition for custom from other lenders. 

Shares to buy for growth 

I would also acquire Premier Foods (LSE: PFD) for my portfolio of dirt-cheap FTSE 250 shares. This company is currently experiencing bumper demand for its food products.

Full-year adjusted pre-tax profit is expected to be at the top end of its expectations after sales grew 6.3% in the first quarter of its financial year. Its international business also appears to be growing at a rapid clip. Sales increased 17%, compared to 2019 levels in the first quarter. 

After making a substantial dent in its pension and debt obligations last year, the company now has more money to spend on marketing and product innovation. I think this clearly shows in the recent results. 

Based on growth expectations, the stock is trading at a forward P/E of 9.6, which I think looks cheap compared to the company’s potential. That is why I would buy the stock. 

Some challenges it could face going forward include inflationary pressures on wages and ingredients, as well as competition. 

Global champion 

The final company I would buy from my portfolio of FTSE 250 shares is the global ingredients group Tate & Lyle (LSE: TATE). 

Earlier this year, Tate completed the sale of a controlling stake in its primary products business for $1.3bn. The transaction essentially broke the group apart.

The remaining business is focused on food and beverage solutions designed to make food taste better and healthier. This is a faster-growing global market than the legacy division. 

The company is looking to return £500m to investors through a special dividend, and the rest of the proceeds will be used to reduce debt. 

Despite the transformative deal, the stock is selling at a P/E of 11.9. That looks too cheap to me, especially considering the organisation’s growth potential over the next few years. 

Risks the company may encounter going forward include cost and ingredients inflation as well as competition in the food additives business. All of these challenges could prove to be a drag on earnings growth. 

Steady trading and financial record

I like the dividend payer because of its steady multi-year financial and trading record. And the business has the advantage of operating in the food sector. I see the industry as attractive because of its defensive tendencies. There’s often consistent demand for food and food-related products no matter what the wider economy is doing.

However, Tate & Lyle is potentially more than just a sleepy cash-cow business. Back in July, the company announced its intention to reposition itself as a “growth-focused” global food and beverage operator. And in a bold move, proposed separating its business into two companies.

One will be Tate & Lyle, which the directors describe as a food and beverage solutions business focused on faster-growing speciality markets. And the other will be NewCo, which they describe as a leader in plant-based products for the food and industrial markets.

NewCo will own Tate & Lyle’s “primary products” business. And that means operations nearer the beginning of the food-production chain, such as corn wet mills in the USA, and acidulants plants in the USA and Brazil.

Tate & Lyle plans to joint-own NewCo with a company called KPS Capital partners. Each will own 50% of NewCo with KPS running the show and having board and operational control. Tate & Lyle expects to receive gross cash proceeds of around $1.3bn for the sale of the controlling stake in NewCo.

Squeezing more value and potential from the business

But Tate & Lyle’s 50% equity interest will ensure the company benefits from NewCo’s success via a stream of future dividends if things go well. And the potential deal looks to me like an elegant solution for squeezing value from the existing Tate & Lyle set-up. The two standalone businesses will be able to concentrate on their respective strategies. And I reckon a narrower focus is almost always a good thing in business — it trumps trying to deal with too much and aiming to be all things to everyone.

We gained insight into the proposed new, streamlined Tate & Lyle’s potential in a news release delivered on 19 October. The company reported opening its new technical application centre in Dubai. And the directors reckon the $2m “state-of-the-art” centre will house the company’s food scientists. And they will focus on developing solutions for food and beverage customers in the Middle East, Turkey and Africa. In those areas, along with other regions, there’s a “growing demand” for foods with less sugar, fat and calories, and more fibre.

I think the company’s investment in the area underlines its commitment to pursue growth markets wherever it sees them emerging. And we could see some steady operational advances pushing shareholder dividends and the stock price higher in the years to come.

Of course, nothing is certain and the company could face setbacks ahead causing the share price to fall. Indeed, City analysts have yet to predict any meaningful growth in earnings over the next couple of years. Nevertheless, I’m tempted to hold some of the shares to collect the dividend while waiting for growth to arrive.

FTSE 250 giant

Tate & Lyle’s journey began back in the 1920s as a sugar refining business. Fast forward 50 years and it shrewdly began to diversify its product range in the 1970s. It now focuses on producing bulk ingredients for food manufacturers. 

As I write, shares are trading for 703p per share. The share price is down nearly 10% in the last three months since the announcement of full-year results and the news that the business would be split in half. This will happen by selling parts of the business. I am not concerned by the share price drop. In fact, I see it as an opportunity to buy shares in the FTSE 250 incumbent cheaper than usual.

Tate’s announcement will benefit it in the long term in my opinion. The new business will focus on plant-based products for food and industrial markets. The legacy business will remain as is but focus on faster-growing speciality markets. This repositioning will allow it to capitalise on consumer demand for healthier options. Demand for healthier options has increased since the pandemic began.

Tate will receive £0.9bn from the sale of its interest in the new company. Tate’s management team have committed to using £500m to return to investors. As a potential investor, this is enticing. The rest will pay down debt and fund growth plans. I believe this could be a very savvy move by one of the oldest listed businesses in the UK.

Two reasons I like Tate & Lyle

1. Tate has excellent defensive qualities. I believe all food production firms have excellent defensive qualities. Consumer staples such as food items are essential for everyday use. Consumers are unable to eliminate them from their budgets totally even in times of financial issues. The pandemic has seen demand for food increase.
2. Tate has a consistent track record of performance. I am aware that past performance is not a guarantee of the future. For example, for the three years between 2018 to 2020, revenue and gross profit grew year-on-year for three years. In 2021, which covered the period of the start of the pandemic in March 2020 to March 2021, the FTSE 250 incumbent saw a slight drop in revenue but still recorded over £2.8bn. It has also consistently paid a dividend, which would make me a passive income.

Risk and reward

Like all FTSE 250 stocks, Tate does have its risks. Firstly, food production is highly specialised and can be costly. It is also highly regulated. If Tate were to have any issues around quality its reputation and share price could be affected negatively. In addition to this, food production is very competitive. Just because Tate has a long history of success behind it does not mean it will always maintain its place in the market. The competition will continue to try and outmanoeuvre it, which again, could affect financials and investor sentiment.

Overall, I do believe Tate is one of the best stocks to buy on the FTSE 250. It has an excellent track record, pays a dividend regularly, and has defensive qualities. I would happily add shares to my portfolio if I had £1,000 to invest right now.

There is a simple reason why I would buy both of these stocks for my portfolio today. In an uncertain world, one thing is certain, that is the fact that humans will always need to eat. Tate and Cranswick both produce and supply food products.

As such, I think these are some of the most defensive UK shares on the market right now. 

Further, it looks as if both firms offer an attractive package of income and growth. 

Defensive UK shares 

Tate is one of the UK’s oldest listed companies. It is currently overhauling its business model for the next stage of growth. 

The group recently announced that it would be splitting itself in two by selling part of its business. 

The so-called NewCo will take over the firm’s plant-based products for the food and industrial markets. Meanwhile, the legacy Tate business will remain a global food, and beverage solutions operation focused on faster-growing speciality markets. 

Management believes that by refocusing the business, the company will be better positioned to capitalise on consumer demand for healthier food and drink, which the global pandemic has accelerated.

As part of this deal, Tate will receive £0.9bn from the sale of its interest in the NewCo. Of this, management has earmarked £500m that will be returned to investors. The firm will use the rest to pay down debt and fund growth initiatives. 

One of the best shares to buy now 

Cranswick is also revisiting its business model as it looks to the future. The company, which produces a range of predominantly fresh food products, has been investing to increase output and improve its ESG credentials.

Last year, the company spent £72m on new production facilities, including £25m on a breaded poultry facility in Hull and a £20m cooked bacon facility. 

In addition, nine of its sites have achieved carbon neutral certification. It also retained its Tier One status in the global Business Benchmark on Farm Animal Welfare for the fifth consecutive year. 

These are the main reasons why I believe these are some of the best UK shares to buy right now. Not only are the two companies investing for the future, but they are also focusing on some of the most central growth themes around right now. These include the rising demand for healthy, high-quality food with a low carbon footprint. 

That said, both organisations do face some enormous challenges. Food production is highly specialised and regulated. If either firm is found to be compromising on quality, reputations could take a huge hit. 

Further, the industry is incredibly competitive. Just because Cranswick and Tate have succeeded so far does not mean that they will continue to do so. 

Still, despite these risks, I would buy both stocks for my portfolio today. As well as their growth potential, both stocks offer an attractive level of income. Shares in Cranswick currently yield 1.8%, while Tate yields 4.2%, excluding the potential special dividend.