ConAgra: This Dividend Champion Will Rise Again

Source: Thinkstock
Source: Thinkstock

ConAgra Foods Inc (NYSE:CAG) is a company that everyone knows. Chances are at least one of its products are in your pantry or refrigerator right now. And let me tell you, this company’s stock is a dividend champion. It currently yields 3.5 percent, and I expect its dividend to grow over time. For those who don’t know the company or the stock, you should get to know it. It operates as a food company primarily in North America. The company operates through four segments: Consumer Foods, Commercial Foods, Ralcorp Food Group, and Ralcorp Frozen Bakery Products. The Consumer Foods segment provides branded, private brand, and customized food products in various categories, such as meals, entrées, condiments, sides, snacks, and desserts, which are sold in various retail and foodservice channels. This segment’s principal brands include Alexia, ACT II, Banquet, Blue Bonnet, Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National, Hunt’s, Marie Callender’s, Odom’s Tennessee Pride, Orville Redenbacher’s, PAM, Peter Pan, Reddi-whip, Slim Jim, Snack Pack, Swiss Miss, Van Camp’s, and Wesson.

The Commercial Foods segment offers commercially branded foods and ingredients that are sold primarily to foodservice, food manufacturing, and industrial customers. It provides specialty potato products, milled grain ingredients, vegetable products, seasonings, blends, and flavors under the ConAgra Mills, Lamb Weston, and Spicetec Flavors & Seasonings brand names. The Ralcorp Food Group segment principally offers private brand food products that are sold in various retail and foodservice channels. Its products consist of cereal products, snacks, sauces and pasta. The Ralcorp Frozen Bakery Products segment primarily offers private brand frozen bakery products that are sold in various retail and foodservice channels. This segment’s primary products comprise frozen griddle products, including pancakes, waffles, french toast, frozen biscuits and other frozen pre-baked products, such as breads and rolls; and frozen and refrigerated dough products. The stock is trading at about $24.70, and I expect it to move higher over time given its recent performance and its commitment to maintaining a strong dividend.

Now on the surface of things, ConAgra’s most recent quarter appeared terribly weak. In fact diluted loss per share from continuing operations was ($0.76) due primarily to significant impairment charges, vs. diluted earnings per share of $0.45 a year ago. Comparable earnings per share of $0.55 declined 8 percent. The Consumer Foods segment sales and comparable operating profit declined due to weak volumes. The Commercial Foods segment sales and comparable operating profit were in line with year-ago amounts. In contrast, the Private Brands segment sales were in line with year-ago amounts, while comparable operating profit decreased significantly. Pricing concessions were needed because of operating challenges, as well as higher operating costs associated with business transitions. I mentioned impairment charges above. Well, due to expectations for continued profit challenges for Private Brands and certain Consumer Foods brands, the company recognized $681 million of non-cash impairment charges. That hurt results.

What was a hugely improvement was that the company generated in excess of $1.5 billion of operating cash flow for the year which was way above expectations. Furthermore, the company repaid a significant amount of debt in the fiscal fourth quarter, resulting in total debt repayment in excess of $600 million for the full year, exceeding targets. Also important to note is that the Ardent Mills transaction closed on May 29, shortly after the close of the quarter, resulting in a cash distribution to ConAgra Foods of approximately $530 million, net of estimated tax. Most of this distribution will be used for debt reduction in fiscal 2015. CEO Gary Rodkin stated:

We are disappointed with fiscal 2014 overall, and we have a very focused sense of urgency directed toward improving our results. Despite the difficult year, we were able to generate substantial cash, meet our debt reduction commitments, and pay a strong dividend. Our focus is on improving branded volumes through more effective trade, marketing, and resource allocation, particularly on several large underperforming brands. We expect private brand profitability to strengthen through organic growth, strong synergies, and gradually improving price/mix. Some of the challenges from fiscal 2014 will still be with us in fiscal 2015, although we believe results will gradually improve throughout the fiscal year. Given that, we consider fiscal 2015 to be a year of stabilization and recovery with a mid-single digit rate of earnings per share growth, which we expect to accelerate in fiscal 2016 and 2017 based on a stronger foundation. Throughout this period, we expect to benefit from strong productivity, robust cost synergies related to the Ralcorp acquisition, and expenses efficiency and effectiveness initiatives.

So why am I getting behind the company after such a poor and difficult quarter and year? Well first because it expects comparable earnings per share in fiscal 2015 to reflect a mid-single digit rate of growth over the comparable base of $2.17 in fiscal 2014. Further the company expects operating cash flow of approximately $1.6-$1.7 billion in fiscal 2015, and to repay approximately $1 billion of debt using a combination of operating cash flow and Ardent Mills net proceeds. But what is the driver of my buy recommendation is the company’s dedication to its shareholders and it’s divided. In fact the company plans to continue its $1.00 per share annual dividend, and is committed to maintaining a strong dividend policy. Thus, I rate the stock a buy and assign a $27 price target.

Disclosure: Christopher F. Davis holds no position in ConAgra and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $27 price target.

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