There's an old saying in personal finance that states you get what you pay for. "Cheap" stocks are rarely ever cheap because they are often value traps. But every now and then, stocks that appear to be cheap can prove to be downright bargains.
Consumer staples company Conagra Brands (CAG 0.38%) is arguably a downright steal. Let's closely examine the company's fundamentals and valuation to flesh out the case for this argument.
Indispensable brands equal pricing power
Most consumers probably aren't familiar with Conagra as a holding company. But with a brand portfolio headed by Slim Jim meat sticks and jerky, Marie Callender's frozen meals, and Orville Redenbacher's popcorn, the company's products can be found in millions of households.
Conagra recorded $3.3 billion in revenue for the fiscal second quarter of 2023, ended Nov. 27, which was up 8.3% over the year-ago period. How did the large-cap company deliver solid growth to shareholders during the period?
Conagra's organic net sales increased 8.6% year over year in the second quarter. This was largely the result of a 17% surge in its price and mix stemming from inflation-driven price hikes. Due to the strength of the company's brands and the fact that everyone has to eat, consumers responded better than expected to elevated prices. Conagra's volume declined just 8.4% for the quarter. Because the company has an international presence and the U.S. dollar has been robust lately, this was responsible for a 0.3% headwind to net sales during the quarter.
Conagra's non-GAAP (adjusted) diluted earnings per share (EPS) soared 26.6% over the year-ago period to $0.81 for the second quarter. Tight cost management led the company's cost of goods sold to rise just 3.8% year over year to $2.4 billion during the quarter. This is how Conagra's non-GAAP net margin expanded by more than 180 basis points over the year-ago period to 11.8%. Along with a 0.2% reduction in the company's outstanding diluted share count, this is why Conagra's adjusted diluted EPS growth rate came in much higher than net sales growth in the quarter.
The company's high earnings growth seems poised to continue. Analysts believe Conagra will generate 8.3% annual adjusted diluted EPS growth through the next five years. This forecast is slightly higher than the packaged goods industry average growth projection of 7.9%.
Image source: Getty Images.
Conagra's market-topping dividend can keep growing
Conagra's 3.3% dividend yield is attractive when stacked up against the S&P 500 index's 1.7% yield. And the company's promising earnings growth outlook paired with a manageable dividend payout ratio should power healthy dividend growth.
Conagra's dividend payout ratio is positioned to come in under 49% for its current fiscal year, which will end in May. This gives the company the flexibility to complete bolt-on acquisitions and repay debt, which is why I believe dividend growth will be in the high single digits annually over at least the medium term.
A deeply discounted valuation
Conagra is a wonderful business. And the consumer staples stock's current valuation arguably doesn't do it any justice.
Conagra's forward price-to-earnings (P/E) ratio of 14.2 is materially below the packaged foods industry average forward P/E ratio of 17.8. Considering the company's iconic product offerings and above-average growth prospects, Conagra's stock should be trading at a much higher valuation multiple. That's what makes Conagra such a compelling dividend stock for this month.
