Chemicals giant LyondellBasell recently slashed its dividend in half. As a result, it lost its crown as the highest-yielding dividend stock in the S&P 500. Taking its place at the top is Conagra (CAG 3.09%) with its 7.4%-yielding payout.
Here's a look at whether the high-yielding food stock can do a better job satisfying investors' hunger for sustainable dividend income than its predecessor.
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Why the high yield?
More often than not, there's a reason a company has a high dividend yield. In Conagra's case, inflation has been eating into demand for its food products. The maker of Marie Callender's, Healthy Choice, and other packaged food brands has experienced declining sales and profit margins as consumers switch to cheaper generic brands. Its net sales declined 6.8% during its fiscal second quarter, due to the divestiture of non-core brands and declining organic sales. Meanwhile, its adjusted earnings fell from $337 million, or $0.70 per share, to $218 million, or $0.45 per share.
The company's declining financial results have put pressure on its share price, which is down about 50% over the last three years. That lower share price has driven up Conagra's dividend yield.
NYSE: CAG
Key Data Points
A look at the metrics backing the dividend
Conagra expects its adjusted earnings will be between $1.70 and $1.85 per share this year. With its dividend costing it $0.35 per share each quarter ($1.40 annually), the food company's dividend payout ratio is around 80%. That's an elevated level. It's well above the company's 50%-55% target range.
While Conagra's earnings can cover its dividend, its cash flow tells a different story. The company generated only $331 million in net cash flows from operating activities during the first half of its fiscal year. That's down from $754 million in the year-ago period, due to lower profits, inflation-driven increases in inventory costs, and the accelerated collection of outstanding receivables in the year-ago period. Meanwhile, its free cash flow after capital expenditures fell from $426 million to $113 million, which didn't come close to covering the $335 million in dividends it paid. On a positive note, Conagra's net debt declined by 10.1% over the past year to $7.6 billion due to non-core product divestitures. However, its 3.8 times leverage ratio is well above its 3.0 times target.
Despite the company's issues, it expects to have the cash flow to achieve its three main priorities: invest in growth, repay debt, and pay dividends. Conagra believes that its balanced capital allocation strategy will drive low-single-digit revenue growth over the long term, while delivering mid-to-high single-digit earnings-per-share growth. It also continues to target generating over $1.2 billion in annual cash flow from operations, which would go a long way to helping it achieve its targeted leverage and dividend payout ratios.
Conagra might leave income investors hungry
Conagra wants to maintain its big-time dividend. However, its declining financial results are putting its payout on shaky ground. Because of that, it's not the best high-yield dividend stock to buy if you want a bankable income stream. While the company expects its financial results will improve over the long term, there's a high risk it could follow LyondellBasell in cutting its dividend if that recovery doesn't start soon.
