As sales of its foods creep up, Campbell Soup Company (NYSE:CPB) has increased its dividend. It now pays out a 2.95% yield, $0.312 per share per quarter. A good return alone isn't enough to warrant a dive into this bowl, though. In order to be one of the top dividend stocks on the market, a company needs to show that its returns are consistent, have room for growth, and are based on a solid foundation.
Campbell is having trouble consistently meeting those criteria. While sales have risen 15% over the last two years, earnings per share have risen just 7.5% over that same time frame, and recent sales increases have been lackluster. Campbell is losing something along the way, and the bottom of the bowl might be in sight.
Cash flow is consistent but in demand
An increase in sales hasn't filled up Campbell's coffers. The company has continued to invest heavily in itself, while paying out a dividend and buying back shares. That's left Campbell looking at less and less cash in the bank. During its last fiscal year -- fiscal 2014, ended August 3 -- the company's cash position dropped 30%, down to $232 million.
The dent in the reserve has come from continued payouts. In fiscal 2014, Campbell generated free cash flow of $552 million. That's the cash the company generates from operations minus its investment in plant and operational assets, required to keep the company growing as it has been. Of that $552 million, Campbell spent $391 million -- 71% of its free cash flow -- on paying out dividends. The year before, it generated $683 million and spent just 54% on dividend payments.
One of the factors that offsets some of the damage done this year is that Campbell did have some one-off payments and tax impacts from the sale of one of its European lines and the repayment of some of its long-term debt. Those things should reverse course in 2015, though the company is now planning to spend additional cash on starting its share repurchasing plan back up.
Sales of packaged food are sluggish
Campbell's top-line growth has been slow but steady. Revenue rose 2.7% last year and operating margin expanded to 14.4%, even as gross margin fell slightly. The company has made solid acquisitions in recent years, including Plum Organics and the Wolfgang Puck line. Those brands have helped the business expand itself, even as the market slows.
Consumers are more interested in healthy food than they used to be, putting traditional packaged food in a tight spot. Campbell has countered this trend by making acquisitions of companies that focus on organic and fresh feeling foods, while divesting itself of businesses like its European simple meals, which were more akin to the TV dinners of old.
The trend toward acquisitions and mergers has swept the industry, with smaller companies integrating themselves into larger corporations left, right, and center. Campbell is at the top of that food chain, and it could gobble up smaller players to keep its bottom line growing. Dividend investors might have to wait for slow years to see jumps in payouts, though. In fiscal 2014, Campbell held its dividend level in order to conserve capital for investing.
Campbell has been busy with its cash
Campbell has been spending its cash, but it's not doing it wantonly. The company has made solid purchases, bought back shares when it had cash, and cut down on its long-term debt. The problem for dividend investors is that those priorities have pushed returning cash to shareholders way down the list.
Campbell's CFO said on a recent call that "[Campbell's] first priority is to fund [its] ongoing business, the second would be dividends, third M&A, and the last would be share repurchases." That hasn't exactly lined up with actions, though, as acquisitions took a chunk of the company's cash in 2013, while dividends held level.
However, Campbell has said that 2015 is going to come with a return to repurchasing action. The company still has $750 million authorized for share repurchases with no timeline for making those investments. If capital starts to feel a little less restricted, investors should expect to get some good news in the next fiscal year.
While Campbell is a solid business and a fine dividend player, it's not going to make the top of the charts because of its inconsistent dividend increases and current focus on internal investment. I like the company and its prospects, though, and would be hard pressed to think of any great reasons not to own this American staple.
Andrew Marder 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.