Why ConAgra Foods Should Increase Its Dividend

ConAgra management is being too stingy with its dividend and needs to reward its loyal shareholders who have stuck around despite the stock performing so poorly this year.

Jul 22, 2014 at 12:56PM

One of the more popular investing strategies these days is income investing. In the years since the 2008-2009 recession, more and more investors are clamoring for the steady returns provided by dividends. There's good reason for this considering that dividend payouts have historically been an important component of total returns.

That's why stocks that have solid dividend yields, like major food companies ConAgra Foods (NYSE:CAG) and Campbell Soup (NYSE:CPB), attract lots of attention. Indeed, ConAgra's 3.2% dividend yield towers above what you'll get from the average stock. The yield of the S&P 500 index stands at approximately 2%.

But ConAgra doesn't have as much to offer as you might think. Dividend growth is a huge part of income investing. Investors should be concerned about dividend growth as well to make sure their purchasing power is protected with inflation.

For that reason, ConAgra will disappoint you. Its dividend growth over the past several years and its prospects for future dividend growth leave much to be desired due to its overly cautious management.

When dividend yield doesn't tell the whole story
Sometimes, a stock's dividend yield can be misleading. ConAgra's dividend yield looks good now, but its future dividend growth potential is disappointing. That's because ConAgra management is fairly stingy with cash flow.

Here's how ConAgra stacks up against Campbell Soup in some key financial metrics, including their abilities to generate cash flow and the amount of their cash that is distributed to investors.

 

5-Year Dividend CAGR

Free Cash Flow Payout Ratio

5-Year Free Cash Flow CAGR

ConAgra

5%

44%

11%

Campbell Soup

4%

54%

7%

Source: ConAgra and Campbell Soup 2009-2013 10-K

And yet, management is fairly conservative when it comes to the dividend. The company has only grown its distribution by 5% compounded annually over the past five years despite the fact that it paid out less than half of its free cash flow last year.

Management's reluctance to send more cash back to investors is equally confusing given the way the company stacks up against Campbell Soup, a close competitor in the packaged-foods industry. ConAgra's compound annual dividend growth over the past five years clocks in at just 1 percentage point higher than Campbell's, even though ConAgra's cash flow generation has been much stronger. Moreover, ConAgra carries a more modest payout ratio, meaning it has enough financial flexibility to be more generous with its payout.

But ConAgra's dividend growth has really stalled. In fact, the company has increased the payout once in the last two years. Here are the primary culprits.

What's causing ConAgra to hold steady?
One of the reasons behind ConAgra's slowing dividend growth is that management is worried about its major acquisition. In an attempt to boost its presence in private-label brands, ConAgra bought Ralcorp Holdings for $4.9 billion.

But the acquisition isn't going well. ConAgra is struggling with significantly elevated costs. ConAgra's private-brands segment posted a $573 million net loss last quarter due to significant impairment charges resulting from higher-than-expected integration costs.

In addition, management is worried about the company's bread-and-butter products losing favor with consumers. Consumer preferences can swing wildly, and shelf-stable products are losing out to fresh alternatives in the grocery aisle.

To that end, ConAgra's flagship consumer-foods segment, which includes its core brands Healthy Choice, Orville Redenbacher's, and Chef Boyardee, posted a 7% sales decline in its recently concluded fiscal year.

For these reasons, management is content to keep its dividend growth on hold.

ConAgra management is too conservative
It's understandable that ConAgra would avoid giving investors a huge dividend increase that might jeopardize its cash flow. But a modest bump in the dividend, similar to its historical dividend increases over the past five years, would hardly bring the company to its knees. It would, however, represent a nice boost for its faithful shareholders who are sticking with the company through thick and thin.

ConAgra is in a difficult period, but its financial position is far from dire. The company still generates healthy free cash flow and distributed less than half of it last year. ConAgra has more than enough room to increase the dividend.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers