On the surface, ConAgra Foods (NYSE:CAG) may seem like a winning dividend stock. The company pays an annual dividend of one dollar per share and boasts a 3% dividend yield. However, smart investors know that chasing yield can be a dangerous game. Instead, investors must look at the underlying fundamentals of the business to uncover whether a company such as ConAgra Foods can afford to continue paying its dividend in the future. Here are two things ConAgra dividend investors need to know about the health of its business today.
ConAgra's dividend is unsustainable
ConAgra's dividend could be a risk because of the company's heavy debt load and unsustainable payout ratio. Let me explain. The packaged food giant carried more than $8 billion in long-term debt on its balance sheet in the most recent quarter. That compares to just $133 million in cash on its books during the same period. ConAgra has a plan in place to help reduce debt going forward. However, declining profitability and weak sales volume in recent quarters could limit the company's ability to generate significant cash flow in the near term.
This problem is exacerbated by the fact that ConAgra paid out more in dividends in the past year than it earned. That's particularly concerning given the stock's payout ratio of 94%. For those keeping score at home, this means that for every dollar of net income ConAgra generates, 94% of it is being paid out as a dividend. If ConAgra isn't able to significantly boost sales in the quarters ahead, it may not have enough cash on hand to continue paying its dividends.
Faced with weak volumes for its three core brands including Chef Boyardee, Healthy Choice, and Orville Redenbacher, ConAgra should be investing more cash toward brand development and R&D. Volumes of its consumer foods products plummeted 7% in the most recent quarter.
Investors should also know that ConAgra's acquisition of Ralcorp could pressure the stock over the near term. ConAgra's management is quick to point out the estimated $300 million in "synergies" by fiscal 2017. However, the tie-up with Ralcorp is not without risks. As fellow Fool Bob Ciura points out, "ConAgra took a massive $681 million noncash impairment charge due to higher than expected integration costs pertaining to its acquisition of Ralcorp Holdings."
ConAgra closed the $5 billion buyout of Ralcorp last year. Yet, since that time it has run into execution problems in respect to integrating Ralcorp's private-label business with ConAgra Foods' packaged goods segment. On top of this, ConAgra took on additional debt to fund the acquisition. As one of the most highly leveraged companies in the food products industry today, adding more debt to its books is the last thing ConAgra needs. For dividend investors, all of these things matter because they could affect the company's ability to meet its dividend obligations to shareholders down the road. From ConAgra's unsustainable payout to its growing debt load, there are much safer dividend stocks available for investors today.
Tamara Rutter 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.