Food giant Conagra (CAG -0.61%) has been publicly traded since 1971 and is known for managing brands like Birds Eye, Healthy Choice, Slim Jim, Duncan Hines, and Vlasic. The company entered 2020 (and the coronavirus pandemic) carrying a heavy debt load that it couldn't address because of the widespread impact of the pandemic.
As Conagra looks to fiscal 2024 (started May 29), reducing leverage is going to be a key goal. Here's why investors should care.
Conagra was operating on the back foot when the pandemic hit
No company was ready for a global pandemic that hit in the spring of 2020, so it isn't fair to suggest that Conagra was somehow uniquely taken by surprise. In 2019, its debt load was elevated following its 2018 purchase of Pinnacle Foods. To put a number on that, long-term debt increased by 215% in 2018 and was still up 185% over 2018's starting point by the beginning of 2020.
CAG Total Long Term Debt (Quarterly) data by YCharts
Conagra's debt-to-equity ratio climbed from roughly 1 to around 1.4 over that two-year span. The debt-to-EBITDA ratio rose from less than 3 to nearly 6. If it were business as usual in 2020, the increase in leverage wouldn't have been such a big deal. However, the upheaval caused by the pandemic meant Conagra couldn't focus on its balance sheet.
Instead, management was occupied with supply chain snarls and ensuring it could fill retailers' shelves. Then, once the world started to come to terms with the coronavirus, inflation started to rear its ugly head. Basically, Conagra was focused on putting out fires over the past three years or so, not on mending its balance sheet.
Conagra is back to normal(ish)
As Conagra reported fiscal fourth-quarter 2023 earnings, it signaled to investors that the business was finally on a more solid footing, operationally speaking. With all of the major headwinds of the past few years normalizing, the company could finally focus its time and financial resources on deleveraging the balance sheet. That's a good thing, given that leverage can make it harder for businesses to maneuver during difficult periods. Rising interest rates are another reason to like this move since increased interest costs could end up hindering otherwise strong financial results.
CAG Times Interest Earned (TTM) data by YCharts
The timing couldn't be better, because the company's debt-to-EBITDA ratio, now at 6.2, is near its highest point in the past five years. Meanwhile, Conagra's ability to cover its trailing interest expenses, as measured by the times-interest-earned ratio, is near its lowest point over that span at just 2.7. Neither of these numbers suggests that the food maker is somehow in financial distress, but investors tend to frown on companies with high leverage and modest interest coverage ratios.
CAG Times Interest Earned (TTM) data by YCharts
Notably, Conagra does not compare favorably with some of its prominent peers on either of those two metrics. So assuming management lives up to its word and moves to return leverage to more historical levels, there's a chance that investors will take a second look at the stock, which has drastically underperformed the consumer staples sector over the past five years. Of course, that sluggish stock performance has also resulted in an attractive 4.2% dividend yield.
That dividend yield is the opportunity today if you are an income investor. With less debt, Wall Street might be a little less glum about the stock, making now an opportune time to pick up the high yield as the business refocuses on this very issue.
That said, more conservative investors should probably wait until management's fiscal first-quarter update to make sure that the promised debt reduction efforts have begun. But more aggressive types looking to maximize the income they generate might want to jump now before the change starts to show up in the financials.
A unique situation for Conagra
No business moves forward in a straight line, with good times followed by bad and vice versa. Conagra has muddled through a hard period, with the increase in debt just before the pandemic causing extra problems for the company. But with the COVID-19 crisis behind it, Conagra can start to tread a more normal path, which means finally mending the balance sheet. It seems likely that Wall Street will take a more positive view of the future here as the company's debt levels decline.
