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3 food shares I’d love to nibble on

Credit: Stéphanie Kilgast

Sometimes it’s hard to identify when a service or product will have demand or not.

For example it’s impossible to say which way demand for BHP Billiton Limited’s (ASX: BHP) resources will go one year or the next. The demand for financial products can be equally erratic, just look at QBE Insurance Group Ltd (ASX: QBE) and Perpetual Limited (ASX: PPT).

If you don’t like big volatility then perhaps it would be better to buy businesses that have relatively stable yet growing demand. Food and drink is always in demand, we consume it every day.

However, it isn’t as simple as saying the whole food industry is a good investment. GrainCorp Ltd (ASX: GNC) hasn’t gone anywhere over the years. As shown by an article here by Sean O’Neil.

Here are three food stocks with strong performances and good prospects in the food industry that I’m considering investing in:

Tassal Group Limited (ASX: TGR)

Tassal operates salmon farms in Tasmania’s waters, it has a market capitalisation of $600 million.

Over the last five years the share price has grown by 213% thanks to impressive results from the company. The share price rise was driven by increasing sales, profits and the size of its salmon population, which is an indication of near term results.

Salmon is becoming increasingly popular thanks to Australians’ changing diet, with salmon being one of the healthier meats. Tassal recently acquired DeCosti Foods, meaning it now sells all types of seafood not just salmon.

Tassal is trading at 13.6x FY17’s estimated earnings with a grossed up dividend yield of 5.03%.

A2 Milk Company Ltd (ASX: A2M)

This dairy product producer is known for its unique milk offering and more recently its growing baby formula products.

The recent issues for Bellamy’s Australia Ltd (ASX: BAL) seem to have been a2’s gain. A2’s management disclosed a 414% rise in infant formula revenue and a 127% rise in total revenue during FY16. There could be many years of strong growth ahead as China only recently dropped its one child policy.

It’s trading at 26.8x FY17’s estimated earnings and is expected to start paying a dividend soon.

Costa Group Holdings Ltd (ASX: CGC)

Costa is a grower of many different types of foods including tomatoes, citrus fruits and mushrooms. It has a market capitalisation of $1.1 billion which could grow strongly over the coming years.

With farms in North Africa, China and Australia it has a presence on three continents. It could slowly become a global force thanks to a greater ability to raise capital when required now that it’s listed on the ASX. There will always be demand for healthy produce and Costa can deliver this.

One thing to monitor will be the revenue it receives for its produce as the benefit of rising total output of food could be nullified if prices decline.

It’s trading at 43x FY16’s earnings with a grossed up dividend yield of 3.74%.

Foolish takeaway

I think all three of these businesses will make solid investments over the coming years. If I had to narrow it down to two I’d pick a2 and Costa. If you’re after even more dividend growers, you should look at these five dependable blue chips.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of A2 Milk and Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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