Dividend investors tend to gravitate to quiet backwaters of the stock market, as the mature, stable companies that populate those areas often give substantial portions of their earnings back to shareholders in the form of dividend payouts. The consumer-goods area is a popular one for such stocks, and food giant ConAgra (NYSE:CAG) has enticed many dividend investors with a solid 2.7% yield, higher than what you'll see in the overall market. Yet despite some of its attractive features, ConAgra lacks a few outstanding characteristics that you typically see in top dividend stocks. Let's look at three reasons why ConAgra falls short of being a top dividend stock.
1. ConAgra's dividend growth has been uninspiring recently.
From a current-yield perspective, ConAgra's nearly 3% payout is enough to make it respectable among its peers. Yet smart dividend investors aren't content with current high dividend yields; they also want to see companies that can sustainably grow their dividend payouts over time.
Until the mid-2000s, ConAgra did a nice job of consistently raising its dividends, with regular annual increases of 10% or more throughout much of the 1990s. But the pace of that dividend growth slowed, and in 2006 ConAgra slashed its dividend by more than a third as part of a broader plan to try to restructure its operations and shore up its future prospects.
Since then, ConAgra's dividend growth has been spotty at best. Although the company made an impressive 15% dividend boost in 2010, its penny-per-share increases in the two following years didn't inspire much enthusiasm. Even worse, ConAgra hasn't raised its dividend at all since late 2012, ending its short streak of annual increases. Without any commitment to higher dividends, investors can only be content with what they see now from the food giant.
2. ConAgra isn't seeing much strength in its fundamental business.
ConAgra has faced an uphill battle generating substantial growth in revenue and net income recently. Over the past two quarters, ConAgra has seen year-over-year sales decline, with particular weakness in its consumer foods and private-label brands segments. With several of ConAgra's most popular brands under pressure, including Orville Redenbacher, Chef Boyardee, and Healthy Choice, the company's earnings also fell from year-ago levels in its most recent quarter.
Of particular concern has been ConAgra's difficulty in integrating its acquisition of Ralcorp Holdings. Investors expected the move to bolster ConAgra's presence in the private-label segment, which has become more important than ever as grocery store chains aim to boost profit margins by selling their own products rather than relying on premium brand-name sales. Yet operational efficiency has been a problem, and customer discontent has weighed on ConAgra's profitability, leaving it with the need to look elsewhere for better prospects.
ConAgra is working hard to turn its business around, yet the turnaround could take a while. Until growth returns at a faster pace, it'll be hard for ConAgra to feel confident in lifting its dividend further.
3. ConAgra has more important needs for its cash right now.
Another consequence of the Ralcorp acquisition is that ConAgra took on substantial amounts of debt in order to complete the deal. The company has done a good job of paying down that debt recently, but the need to do so before favorable conditions in the credit markets give way to interest rate increases means that dividend investors will have to take a back seat to debt repayments for the foreseeable future.
ConAgra expects to reduce its debt by about $1 billion in 2015. Yet with $7.9 billion in debt outstanding, it'll be a long time before ConAgra's debt level returns to normal conditions, at which point the company will have more confidence boosting payouts again.
ConAgra isn't a bad stock, and its dividend yield is still notable. But by itself, that's not enough to satisfy discriminating dividend investors. For those who want more than just a high current yield, ConAgra's future prospects simply aren't certain enough to put the stock into the ranks of the elite top dividend stocks in the market.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.