The financial signals are mostly good at Campbell Soup
The earnings yield is a robust 6.92% just now, the dividend is yielding about 3.4%, and steady cash flow is converted into stock buybacks that have reduced shares outstanding about 17% over the past five years.
The dividend seems to rise regularly and generously.
So, what's not to like?
Well, obviously there's the problem of growth that all major food companies face. First half sales for fiscal 2011, ended January 30, fell 1%, despite lots of promotional spending. The problem is most acute in the U.S. soup (Campbell's), sauces (Prego and Pace) and beverage (V-8) unit, where sales fell 4% and operating earnings were down 13%.
Kraft and Sara Lee and others are struggling to grow, too, but can any food company compete with Campbell for having such a dreary product line? It's a powerful brand name, but with products pitched just above store brands, and many of the store brands taste better. And brand names somewhat pricier than Campbell's products taste a lot better.
Revamping its North American management team in January in hopes of boosting growth, Campbell saddled one of the promoted, Darren Serrao, a vice president, with a title that includes the term "breakthrough innovation." Good luck with that, Darren. Campbell spends about $125 million a year on R&D, but where's the breakthrough?
Acquisitions of late have been small and uninspiring. Campbell sold off Godiva in 2008 for $850 million. Yeah, maybe it didn't fit, but that was one product line the taste buds could get excited about.
Indeed, most of the fancy cooking seems to come from the finance department. With the Campbell buybacks of recent years, debt is up and equity is down:
That gives Campbell a ridiculous return-on-equity of about 80%, showing how meaningless this figure has become in an era of aggressive balance sheet management.
The cash flow is good, though it has little chance to accumulate on the balance sheet with all those buybacks.
Margins are pretty steady, though rising raw material costs could squeeze them going forward. And with Wal-Mart accounting for 18% of Campbell's sales, passing along price increases isn't easy.
Maybe it's the can of Campbell's tomato soup this consumer heated up last week, and then poured out after a few sips (bland). The company is either milking a tired product line while laboriously managing its finances, or on the verge of breaking out of the doldrums with some new products. If it's the latter, Campbell is a buy. Just don't ask me to eat the soup.
Jeff Bailey is an editor for the YCharts Pro Investor Service.
