Tyson Foods (TSN 0.29%) has certainly felt COVID-19's impact, which has hurt production. Additionally, the company is confronting higher costs as management had to spend money on safety equipment to protect its workers. While recent results suggest that Tyson is dealing effectively with the issue and its operations are running smoother, rising cases may prove to be another setback.
Under these circumstances, it is unsurprising that the stock remains in negative territory for the year. Down 28%, does this represent a good entry point?
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Playing defense
Tyson is one of the major producers and sellers of beef, pork, and chicken. The company sells these products under well-regarded names like Tyson, Jimmy Dean, and Hillshire Farm that command shelf space in food stores. Plus, it supplies its goods to commercial establishments.
Even in a bad economy, demand for its products remains stable. Last year, nearly half of Tyson's revenue came from its domestic retail channel. These are places like groceries, supermarkets, and Internet-based retailers. In other words, this is the portion that comes from people buying meat, chicken, and pork to eat at home. This part of the business may even see an increase in demand as people eat out less.
Even though Tyson derives another 28% of its sales from domestic organizations like restaurants, hotels, schools, hospitals, and the military, demand isn't completely tied to the economy or COVID-19. While people may eat out less and curtail their vacation plans, areas like healthcare and the armed forces will hold up well.
Collecting dividends
Despite ongoing issues related to COVID-19, Tyson's results showed an improvement in its fiscal fourth quarter, which ended on Oct. 3. Its adjusted sales fell by 2% versus a year ago to $10.6 billion as the virus continued to affect production. But the company's operating profit grew by 40% to $961 million despite higher COVID-19 related expenses.
Looking to 2021, management expects Tyson's beef and pork business to see somewhat softer demand while the company's chicken and prepared foods experience an uptick.
While I typically wouldn't cheer lower sales, these are highly unusual circumstances. In fact, showing its confidence in the future, Tyson's board of directors recently raised its quarterly dividend by 6% to $0.445. This works out to a 2.7% yield.
You can happily collect the dividends with the knowledge that they are secure. With $2.7 billion of free cash flow (operating cash flow less capital expenditures) last year, this comfortably covered the $601 million of dividends.
Certainly, no one wants to see widespread shutdowns like we experienced a few months ago, but that is a possibility with COVID-19 cases rising. However, while governments are reimposing certain restrictions, investors can take comfort in collecting their dividend checks every quarter. If you are willing to show some patience, Tyson's shares are an attractive investment option.
