The consumer-goods area holds many attractive dividend prospects for investors, and ConAgra Foods (NYSE:CAG) delivers many of the food products that consumers rely on seeing at their grocery stores. In addition to brand names like Healthy Choice, Hunts, and Hebrew National, ConAgra is the company behind many of the store-brand items that have become increasingly popular among grocery chains. Nevertheless, despite a dividend yield that pays shareholders about 2.7% annually, ConAgra's recent history raises some concerns about whether it can give investors the future dividend growth they want. Let's look more closely at two things every dividend investor should know about ConAgra Foods right now.
1. Investors don't expect much growth from ConAgra.
ConAgra is scheduled to release its fiscal second-quarter earnings on Thursday, and investors have low expectations for the company's results. For the quarter, ConAgra will likely see a double-digit percentage drop in overall revenue, and current consensus projections for earnings show a penny-per-share decrease from year-ago levels. Shareholders also expect to see a similar contraction in sales and flat earnings in the current quarter.
Looking longer-term, ConAgra hasn't proven that it will bounce back from its current sluggishness very quickly. For the full 2015 fiscal year, analysts see ConAgra's sales falling 8.5% from 2014, and earnings growth of less than 4% won't provide an inspiring year for growth investors. Even in fiscal year 2016, ConAgra isn't expected to see more than token revenue growth, and a 6%-7% rise in earnings per share could prove overly optimistic.
ConAgra acknowledges that it is in the process of trying to turn its operations around, and it has tried to keep a positive view on its current efforts. As CEO Gary Rodkin said following the company's fiscal first-quarter report in September, "We remain confident that fiscal 2015 will be a year of stabilization and recovery," which he hopes "demonstrates improving fundamentals and better execution" for the company going forward. By cutting costs and looking to maximize the value of its recent acquisitions, ConAgra clearly has the potential to recover -- but it could take a while for it to realize that potential.
2. ConAgra's valuation is cheaper than its peers.
Despite concerns about its growth, ConAgra does have one element in its favor compared to rivals Kraft Foods (UNKNOWN:KRFT.DL) and Nestle (NASDAQOTH:NSRGY): Its stock carries a lower forward earnings multiple. Indeed, historically, ConAgra has consistently had lower multiples than Nestle and Kraft, perhaps reflecting the weaker growth expectations investors had about ConAgra.
The problem, though, is that none of the three major food stocks seems to be particularly compelling from a value standpoint. Investors don't expect any of the companies to have a long-term earnings growth rate of more than 10%, making forward multiples between 16-20 look particularly aggressive.
In large part, the high share prices throughout the sector reflect investors' appetite for low-volatility, lower-risk dividend stocks. Traditionally, value investors flocked to consumer-goods stocks with high dividends, because growth investors weren't as interested in them and they therefore typically commanded cheaper valuations than higher-growth companies. But low interest rates have turned that argument on its head, and now, many dividend stocks actually have higher earnings multiples than non-dividend-paying growth stocks.
Therefore, in assessing ConAgra, it's important not just to look at its industry peers but also at the stock market as a whole. Even though ConAgra looks cheap compared to Kraft and Nestle, its sluggish growth prospects still make current multiples seem a bit excessive.
ConAgra's dividend yield makes it attractive in the eyes of many investors, even though the business has suffered some setbacks that it's only now beginning to overcome. Shareholders need to have the patience to see ConAgra's turnaround through if they want a chance to see the full benefits that could result from its efforts.
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.