In the investing world, two ways businesses can show they care about their shareholders are share repurchases and dividend raises.
When done properly (not overpaying for shares), share repurchase programs lower a company's outstanding share count and entitle shareholders to a bigger slice of its profits. The appeal of dividend boosts is that shareholders receive a rising stream of income that can be used as they wish, whether that is to reinvest in their investment holdings, spend, or donate to charities.
Earlier this month, the consumer staple Conagra Brands (CAG -0.61%) announced a 6.1% boost in its quarterly dividend per share to $0.35. Let's highlight three reasons why the stock could be a buy for investors seeking high starting income and decent dividend growth.
1. A portfolio of regularly consumed household name brands
Most people probably aren't familiar with Conagra Brands as a company. But with brands such as Slim Jim meat sticks and jerky, Orville Redenbacher popcorn, and Swiss Miss hot cocoa and hot chocolate, millions of people routinely enjoy its products.
| Metric | Q4 2022 | Q4 2023 |
|---|---|---|
| Organic net sales growth rate (YOY) | 6.8% | 2.2% |
| Net margin | 10.8% | 10% |
Data source: Conagra. YOY = year over year.
Conagra's net sales edged higher by 2.2% over the year-ago period to $3 billion in the fiscal fourth quarter 2023 ended May 28. This modest top-line growth was largely driven by its price hikes to keep pace with inflation, which propelled net sales upward by 9.9% during the quarter. These increased prices were mostly offset by some pushback from consumers and shortages stemming from supply chain disruptions, which explains the 7.7% decrease in volume for the quarter.
Conagra's non-GAAP (adjusted) diluted earnings per share (EPS) decreased by 4.6% year over year to $0.62 in fiscal Q4. An uptick in selling, general, and administrative expenses due to supply chain and technology investments led to a contraction in the company's profit margin during the quarter. That is how the company's adjusted diluted EPS growth trailed its net sales growth for the quarter.
As inflation recedes further and Conagra's products remain in demand, analysts believe the company's adjusted diluted EPS will compound by 7.7% annually for the next five years. That's moderately less than the packaged foods industry average annual earnings growth outlook of 10.3%. But it's still not a shabby growth forecast for a mature business like Conagra.
Image source: Getty Images.
2. Respectable dividend growth can persist
Stacked against the S&P 500 index's 1.5% dividend yield, Conagra's 4.3% yield should be enough to satiate the appetite of just about every income investor. Combined with its mid-single-digit annual dividend growth in recent years, this makes the company an interesting pick for income investors.
And dividend growth resembling its most recent dividend declaration looks like it can be maintained in the future. That is because the dividend payout ratio is expected to be around 51% in its fiscal year 2024 ending next May. This leaves Conagra with the capital needed to capitalize on growth opportunities, repay debt, and repurchase shares.
3. The stock could be a buy
Conagra appears to be undervalued at the recent $32 share price. After all, the company's forward price-to-earnings (P/E) ratio of 11.4 is considerably below the packaged foods industry average forward P/E ratio of 16.
Sure, Conagra's growth prospects are less than industry peers'. But this is arguably more than priced into the discrepancies in valuation between the stock and its industry counterparts. That is why I believe Conagra stock is a buy for investors who are patient enough to kick back and collect dividends until the market realizes this fact.
