Many investors are looking for "safety" amid the turmoil that's gripped the stock market in recent weeks and months. Campbell Soup (CPB 0.46%) seems to fit that bill. The company's name-brand soups and other strong brands like Prego, Pace, and V8 line grocery store shelves and have been a go-to for consumers for years.
Safety is often code for "stable share price," and Campbell Soup's stock has held up better than many growth stocks, roughly flat over the past year. However, most investors still want solid returns -- who doesn't want their cake and to eat it too? So can Campbell Soup build wealth for investors?
Here's why this "safe" stock might actually cost investors over the long run.
Growth struggles are an issue
Campbell Soup products are staples of any grocery store. In most cases, there is an aisle dedicated to soups, spaghetti sauce, and the other types of pantry products that Campbell makes. But items like canned soup and pasta sauce are things you generally eat occasionally; not many people will likely increase how often they buy soup.
This seems to be showing up in the company's operating numbers. Campbell Soup's revenue has grown an average of just 1% annually over the past decade. The company's profits, reflected as earnings per share (EPS), have grown an average of 3% per year at the same time.
Campbell Soup is a defensive business, and its soups, sauces, and other products will be in demand regardless of whether the economy is doing well. But the company is struggling to grow, which creates a ripple of challenges across the business.
Financials are not ideal
Campbell Soup's management is aware of this lack of growth, as evidenced by the company's aggressive strategy to acquire and sell off brands in recent years. It paid $6.1 billion in cash to acquire pretzel snack company Snyder's-Lance in 2018.
It followed that up by selling off undesirable assets to help raise cash, including its fresh foods business, snack brand Arnott's, and parts of the company's international operations. These moves have helped offset some of the cost of acquiring Snyder's-Lance, but the company still has a net debt position of $4.8 billion (total debt minus cash).
This much debt puts Campbell Soup's leverage at a little over three times the company's EBITDA (earnings before interest, taxes, depreciation, and amortization). It's likely not high enough to financially distress Campbell Soup. Still, this debt load probably denies it the financial flexibility to make more large, strategic moves soon.
Adding it all together
That's unfortunate because it seems that Campbell Soup could keep underwhelming investors. The company has averaged zero revenue growth over the past three years, a time when consumers were stuffing their pantries during COVID-19. Management is also guiding total 2022 sales growth at -2% to 0%.
Analysts expect Campbell Soup to grow EPS by an average of 2% over the next three to five years, which results in roughly 5% annual investment returns when you factor in a dividend that yields 3.1%.
So to get returns beyond that, the stock would have to see its valuation increase. Campbell Soup's current price-to-earnings ratio is just under 16, which is below its decade median of 18. However, it's hard to see the stock earning a higher valuation with stagnant top- and bottom-line growth. With that in mind, it's hard to get excited about Campbell Soup, and I believe double-digit annual returns are unlikely.