Tyson Foods (TSN +0.10%) produces beef, chicken, and pork, some of which it sells via its own branded product portfolio. This is the essence of a necessities business, but meat products are commodities, and that means there's inherent volatility in the company's operations.
Right now, there are a lot of negatives surrounding Tyson, and investors are worried about its dividend. It's an issue to watch, but there are three good reasons to believe the dividend will hold up through this industry downturn. Let's review.
First, a red flag
In the second quarter of its fiscal 2023, Tyson lost $0.23 per share. It paid a dividend of $0.48 per share. It doesn't take much math skill to see that the dividend wasn't covered by earnings in the quarter. Through the first half of the fiscal year, the company's profit was $0.61 per share, with total dividends paid of $0.96, leading to an unsustainable dividend payout ratio of nearly 160%.
Image source: Getty Images.
A payout ratio over 100% is a warning sign that dividend investors should never ignore. It signals that a company is having trouble paying its dividend. In fairness, dividends don't come out of earnings, they come out of cash flow. So a company can pay out more in dividends than it generates in earnings, but a weak payout ratio is important to monitor.
In fact, the problems the company is facing today are pretty extreme. CEO Donnie King said during Tyson's second-quarter earnings call, "I can't remember a time when our business faced the highly unusual situation that we're currently seeing, where all three of our core protein categories -- beef, pork, and chicken -- are experiencing market challenges at the same time." Basically, this is the perfect storm: All of its commodity-driven business categories are slumping at once.
It's no wonder that investors are scared and have pushed the stock down roughly 50% since early 2022. However, there are some positives to consider, given that the stock drop has also pushed the dividend yield, at 3.8%, up toward historic highs.
TSN dividend yield; data by YCharts.
Green flag No. 1: Commitment to the dividend
Even while keeping watch over the payout ratio, investors need to remember that dividend decisions are made by the board of directors with input from company leadership. And, at this point, Chief Financial Officer John Tyson has been pretty clear about the topic, stating in the quarterly call that, "We have increased our dividend for 11 consecutive years and remain committed to supporting our dividend."
As long as the company is committed to the dividend, it should be able to find ways to support the payment through the current headwinds. That might mean taking on debt to generate the needed cash flow, but there are options if the board wants to keep the dividend intact.
NYSE: TSN
Key Data Points
Green flag No. 2: A solid balance sheet
On that score, Tyson has an investment-grade balance sheet. While the debt-to-equity ratio has ticked up a little over the past year, the company's leverage is not high by historical standards. And the debt-to-equity ratio of roughly 0.45 isn't really exorbitant even on an absolute basis. If the board is willing to stick with the dividend, management has room to support it.
Green flag No. 3: The cycle will turn
The resolve of the board, meanwhile, needs to be juxtaposed against the nature of Tyson's business. As noted above, the company operates in a commodity business and naturally goes through good and bad periods. While it's unusual that everything the company produces would be facing headwinds all at once, headwinds are not unusual and are, frankly, par for the course for this food maker.
Knowing that bad periods are eventually followed by good ones, there's no particular reason to think that the board will panic here. History suggests that an industry upturn is basically just a matter of time.
A good risk/reward dividend grower
Tyson's dividend has headed higher in each of the last 11 years. Longer term, it has trended generally higher, and though it hasn't been increased every year, it hasn't been cut, either. The company has muddled through hard times before and continued to reward investors well for sticking around.
With the dividend yield near all-time highs, income-focused investors should probably take a closer look at the stock. Yes, keep watching the payout ratio, but don't assume that a high payout ratio means the dividend is destined to be cut.
