It was one year ago tomorrow that I was making a case for food giant ConAgra
Well, ConAgra had a real surprise for shareholders this morning. The company has "discovered errors in previously reported amounts related to income tax matters." This tax error (which will lead to results from fiscal 2003 and 2004 being restated) is estimated to be $150 million to $200 million. That's no rounding error, and, besides being a lot of greenbacks (even for ConAgra), that's equal to 19.5% to 26.1% of last year's net income.
ConAgra can now be used as the poster child for why the U.S. needed the Sarbanes-Oxley Act of 2002. All the complaints about the law being too cumbersome and expensive blow up when a giant like ConAgra doesn't have the internal controls (which is what the act is all about) to catch accounting errors that may average $100 million a year. Yes, the act was borne out of the Enron and WorldCom calamities, but ConAgra has also proven that internal controls are lacking at companies other than the likes of those two.
Because of the error, the company released preliminary results for the latest quarter. Sales, up 1% from the year-ago quarter, continue to be anemic; income from continuing operations before income taxes (funny to state it that way, isn't it?) was equal to last year, as the company contends with higher materials costs and explores price increases as a means of contending.
The company says its long-term goal is to improve margins and return on capital. That makes sense because its operating margins are half those at Kraft
Of particular concern to the income-oriented investor, ConAgra's dividend payout ratio of 72% is based on overstated net income. The company's lackluster operating results should curtail dividend increases short-term, while also impeding total return.
Conservative investors wanting income might want to consider Motley FoolIncome Investor recommendation H.J. Heinz