Food firms offer taste of stability in rocky times

In turbulent and uncertain times those companies that serve more basic needs such as food production and distribution will tend to come into their own.

Investor

An Insider's Guide to the Market

The demand for food is not subject to the vagaries of the economic cycle in the same way as for example the demand for luxury goods such as crystal glass.

Therefore, it is not surprising to find that the share prices of quoted Irish food stocks have held up reasonably well over the past year.

On an absolute basis, the share prices of Greencore and Glanbia managed to rise though there were significant falls in the Kerry and IAWS share prices.

However, this was a period when the overall equity market was in decline and a better assessment of performance is provided by share price performance relative to the ISEQ Overall index.

This information is given in the final column of the accompanying table and it can be seen that Fyffes, Glanbia and Greencore significantly outperformed the market over the past year.

By contrast, IAWS and Kerry Group underperformed although in Kerry's case the underperformance was a marginal -0.9 per cent.

Compared with many other sectors of the market the food sector seems to exhibit a much wider diversity of performance among the individual company constituents.

This is not too surprising considering that Irish-quoted food stocks have very different business mixes.

Kerry Group has moved heavily into the highly specialised international food ingredients business that offers very attractive profit margins.

IAWS has moved away from its original agricultural commodity-based roots and is now heavily involved in the par-baked food products market through its Cuisine De France subsidiary.

Indeed Kerry Group and IAWS are viewed by the market as growth stocks given their successful track record of diversifying into expanding food businesses.

This has been reflected in the strong long-term share price performance of both companies. Over the past five years Kerry has outperformed the overall market by 25 per cent while IAWS has outperformed by a very strong 126 per cent.

Fyffes, Glanbia and Greencore, on the other hand, have not diversified to a significant extent into higher growth food sectors and this has been reflected in share price under-performance over the past five years with all three companies substantially under-performing the ISEQ.

This stands in sharp contrast to their much better performance over the past year.

Part of the explanation for this relative turnaround in performance can be found in overall trends within the stock market.

The very weak stock market conditions over recent years have caused many investors to seek out companies in stable businesses that offer high dividend yields.

In this regard it is not too surprising to find that Fyffes, Glanbia and Greencore offer investors very attractive dividend yields of 3.9 per cent, 3.2 per cent and 4.2 per cent respectively (see table.

Given continuing market uncertainty it is likely that investors will continue to favour stocks that offer above-average dividend yields over the medium term.

Therefore, the relatively high yields offered by Fyffes, Glanbia and Greencore should continue to act to support each of their share prices.

Whether these three food companies can outperform the market on a continuing basis will depend, however, on company specific developments.

The managements of Glanbia and Greencore have been striving with some success to reorganise and improve the productivity of their underlying businesses in recent years.

Fyffes has continued to concentrate on fruit distribution but remains one of the most efficient players in that market.

In addition, Fyffes has a strong balance sheet with substantial cash resources that give it the financial flexibility to engage in acquisitions.

Kerry Group and IAWS already operate in relatively high growth food sectors and have senior managements that have shown themselves capable of achieving above average profit growth.

Therefore, the hiatus in their respective share prices over the past year will probably prove to be short-lived and healthy profit growth should result in steadily rising share prices over time.

In summary, for investors contemplating returning to the Irish stock market the quoted food companies do seem to offer an appealing mixture of growth and stability in these uncertain times.