On the surface, meat producer Tyson Foods (TSN -0.64%) looks like a top dividend stock. The most recent quarterly dividend payment of $0.48 per share works out to a dividend yield of about 3.8%, more than double the yield of the S&P 500. Tyson has also been consistently raising its dividend, more than tripling the dividend payment since 2016.
A question of sustainability
Most of Tyson's revenue comes from beef, pork, and chicken. These are commodities, and pricing is largely determined by supply and demand. The company also sells prepared foods, which produce consistently higher profit margins.
Demand and prices for meat soared during much of the pandemic's height, and as recently as last year, Tyson was generating solid profits from the core business. Beef in particular was a big money-maker: Beef segment operating margin was 15.9% in the six months ended April 2, 2022, higher than even prepared foods.
The bonanza is now over for Tyson. Prices are dropping, costs are rising, and volumes are struggling to grow. The beef business broke even in the second quarter of 2023, which ended April 1, and both pork and chicken produced operating losses. People are being pressured by inflation at the grocery store, and behaviors are starting to change.
Tyson produced a small net loss in the second quarter, a swing of nearly $900 million from the same period last year. The company expects beef, pork, and chicken to approximately breakeven in fiscal 2023 on an adjusted operating basis. Prepared foods will perform much better, but that business isn't nearly big enough to offset weakness elsewhere. Tyson's free cash flow was negative in the first six months of fiscal 2023.
This brings us to the dividend. Dividend payments eat up about $672 million in cash annually. Tyson had just $543 million in cash as of April 1, although the company entered into a new $1.75 billion term loan facility in May.
The company can fund continued free cash flow losses and the dividend for a while, but it may eventually choose to conserve cash by cutting or scrapping the dividend. It all depends on how long this downturn lasts. If pricing remains weak and costs remain high, Tyson may have little choice but to reduce its payout to investors.
A risky high-yield stock
Tyson's dividend looks tempting, but there's a meaningful risk of a dividend cut over the next year. The stock looks reasonably priced based on sales and book value, although it's certainly not a bargain. Tyson's balance sheet leaves a lot to be desired: Total debt was nearly $9 billion as of April 1, before the new term loan went into effect.
Tyson can cut costs, and it's doing exactly that as part of its productivity program launched in 2022. About $1 billion of savings have already been realized, partially offsetting the cost inflation pushing down the bottom line. Even with those cost savings, though, Tyson is struggling to produce a profit in this environment.
The bottom line: Don't buy Tyson stock for the dividend, because it may not be sustainable. The company should be able to muddle through this downturn and return to profitability once the pricing and demand environment improves, but the dividend may not survive that process.
