Conagra Brands: A Strong Dividend Performer Poised For Growth (NYSE:CAG)

Investment Thesis

Given its historically robust dividend performance and its dividend strength relative to its competitors, as well as its resilience in navigating industry challenges, I believe Conagra Brands (NYSE:CAG) is a good investment opportunity. This is because the stock appears undervalued, and I see an opportunity for solid growth in the medium to long-term. The company’s strategic positioning within the sector is strengthened by its significant market share and a history of continued innovation. To me, this indicates a promising opportunity for both income and growth-minded investors. The Discounted Dividend Model (DDM) valuation highlights a significant difference between the current stock price and the estimated intrinsic value and reinforces the idea of Conagra stock being a buy in my opinion.

Introduction

As I continue my investing journey, my mind is permanently focused on achieving financial independence. With that goal firmly in mind, I continue to gravitate towards a strategy that involves carefully chosen investments in businesses that are straightforward and demonstrate high quality. I see the power of compounding as a fundamental principle to establish a durable portfolio that consistently increases over time. Dividend investing strikes me as an ideal route to fulfil my investment objectives because it seamlessly combines the generation of regular passive income, potential for growth through reinvestment, and a reduction in investment risk, which aligns with my cautious investment approach.

In the interest of finding companies that fit the above criteria, I often find myself navigating the vast sector of consumer staples, as this is a sector I believe I have a solid understanding of. One company within the sector which was in the news late last week was Conagra Brands, which announced that they would be divesting their controlling 51.8% stake in India’s Agro Tech Foods, a move that I found interesting because, as I discussed in my previous article on Whirlpool (WHR), India is a consumer market that I believe offers a lot of growth opportunities for businesses in the long term. This announcement, combined with the solid dividend yield, has prompted me to dive into an analysis of the company to see if now is a good time to invest.

Company Profile

Conagra Brands is a known food company based in Chicago which specializes in packaged and frozen foods. Established in 1919, Conagra has become a notable figure in the food industry, creating and distributing a range of products across different categories like Grocery & Snacks, Refrigerated & Frozen, International and Foodservice. The company prides itself on its collection of brands such as Birds Eye, Duncan Hines, Healthy Choice, Marie Callender’s and Slim Jim, meeting the needs and preferences of consumers. By 2023, Conagra was operating 38 manufacturing plants in the U.S. with around 18,600 employees on board and is presently the fourth-largest food company in the U.S.

Despite the strong performance relative to its peers, where Conagra has seen increased market share across some of its major product lines, the company has seen a continued decline over the past year, dropping more than 20% and is far below its all-time high of $38.84 from January 2023. Despite the price action, Conagra Brands has seen a moderate improvement in profitability and operating margins in this time, and could be an encouraging sign to investors that the stock price may turn around to reflect this improved profitability.

Dividend Discussion

As I mentioned, dividends hold significant importance in my investment strategy, as they represent a reliable source of income and serve as an indicator of a corporation’s fiscal stability, which is crucial for someone like me aiming for financial independence through a strategy focused on secure, long-term dividend yields.

Conagra has built a reputation for paying dividends, having issued cash dividends every quarter since the third quarter of 1989. Over the years, they have regularly raised their dividend amount, achieving a 10-year compound annual growth rate (CAGR) of approximately 13%. Currently, the dividend rate stands at $1.40 resulting in a yield of 4.97% based on the stock price of $27.78. This yield outperforms the average dividend yield of 1.34% seen in the S&P 500 presently.

The company’s payout ratio is at a sustainable 65% indicating a chance for continued or increased dividends in the future. In comparison to competitors like The J. M. Smucker Co. (SJM) and Campbell Soup Company (CPB) whose payout ratios are at 42.6% and 56.1% respectively, Conagra’s dividend performance appears stronger. It also offers a better dividend yield than its competitors based on current valuations.

Financial Discussion

Conagra’s overall financial performance over the past decade has been solid and has slightly over-performed their biggest competition. I think that this over-performance is best highlighted by good top-line and bottom-line growth. Revenue over the past 10 years has grown from $9.03 billion in 2015 to $12.17 billion in the last 12 months (LTM) which corresponds to a CAGR of 5.32%. As for the profitability metrics of CAG, earnings per share (EPS) growth has also been strong, increasing from $1.01 in 2015 to $2.05 LTM, which is approximately 8.18% CAGR over this period. This strong growth has enabled the company to return value to shareholders and continue to increase their market share within the food products industry.

In addition to the solid income growth, especially considering CAG operates within the typically slow-growing food products industry, the company’s balance sheet appears to be respectable, in my opinion. On the debt front, the company does have a considerable amount of debt, with total debt standing at $9.07 billion and a large portion of repayments due in May. When looking at this debt number relative to the company’s comparatively small cash and cash equivalents balance of $61 million, it may seem like that Conagra Brands may struggle to pay down its debt in the coming years. Whilst I recognize that returns to shareholders may be reduced as the company pays down its debts, something which management has stated they are prioritizing, it is my opinion that the company will manage to reach its long-term leverage target of 3x, whilst also maintaining its strong dividend track record, thanks to its solid free cash flow generation. CAG also has a solid current ratio and debt-to-equity ratio which stand at 0.91 and 1.44, respectively, which is another reason as to why I believe the overall balance sheet of Conagra is in a respectable position.

Looking to more recent financial discussion of Conagra, in particular, the latest quarterly earnings, which were released 4 January 2024, the company has seen a decline in revenue of 3.4% compared to the previous year whilst EPS declined at a steeper rate, being a 24.1% decline to $0.60 in the quarter compared to the previous year’s EPS of $0.79. Management attributed the decline in revenue and EPS to the tough macroeconomic environment, which caused lower product volumes for the company. Of course, a decline in sales and profitability over the past year and the fact that the company is guiding a 1% to 2% decline in organic sales growth isn’t great for investors, however, I think it is important to consider that many of their competitors have also experienced declines in sales over the past year. Additionally, the company is guiding $2.60 to $2.65 for FY 2024, which represents a significant increase from the previous year if achieved. On the dividend front, the quarterly dividend grew at 2.94% to $1.40 compared to the prior year, and, for me, is an encouraging sign that the company will be able to continue paying and raising their dividend in the future given that they have been able to so during a difficult operating environment. Additionally, I believe that this decline in revenue will likely be a short-term issue for Conagra, as I believe factors such as the growing frozen food and snack market and the company’s continued innovation will drive growth for the business in the long term.

Strong Position Within Growing Markets

Although Conagra Brands has experienced a revenue decline in the past year, this can be viewed as a temporary setback, in my opinion, especially when considering that sustained market growth is expected and Conagra has developed robust strategies to capitalize on the market trends.

The US Frozen Food Market, of which Conagra is a dominant player, is forecasted to expand from a valuation of $64.04 billion in 2023 to $84.36 billion by 2030, with a CAGR of 4.7% during the period from 2024 to 2030. Furthermore, the Snack Food market is also expected to grow, with a CAGR of 3.84% from 2024 to 2028. This industry-wide growth bodes well for Conagra, in my opinion, particularly given its strong foothold in these sectors. Conagra has entrenched itself as the market leader in the single-serve frozen meals category and is a testament to its strategic focus on innovation and an understanding of consumer trends, in my opinion.

Whilst the growing market is promising as it should assist CAG increasing its sales volume, what is more encouraging for investors, in my opinion, is that Conagra holds a 45% share in the frozen food category and controls the number 1 spot in the sector and has managed to increase this lead by 3.3% over the last four years. For me, this is important as it indicates that the company has been able to successfully implement new products and has managed to retain customers whilst also attracting new consumers, often at the expense of its competitors. The outperformance of competitors is also seen in several snack categories such as popcorn and meat snacks, where the company has continued to capture market share, enhancing the competitive advantage the company enjoys by increasing brand recognition. This, to me, is a more important factor than solely operating in an expanding market as an expanding market doesn’t guarantee that the company will benefit, whereas businesses that can capture a larger share of the expanding pie are generally in a much stronger strategic position.

Valuation

As I discussed previously, I believe Conagra has a solid growth track record over the past 10 years and appears to be set for a reasonably stable future, and as such, it is a company that I would like to own at the right price in order to capitalize on the attractive dividend Conagra pays. Looking at the valuation of CAG, it currently has a valuation grade of B, suggesting the company is currently slightly undervalued, which is contradicted by Wall Street, which has assigned a hold rating to Conagra. At its current price of $27.78 Conagra’s price-to-earnings (P/E) ratio appears to be lower when compared to its competitors and is presently below its 5-year average PE ratio, which is an encouraging sign in my opinion and may suggest that the company is undervalued and potentially offers a good opportunity for investors.

For me to determine how undervalued CAG is, I have used a DDM, which estimates a stock’s price by discounting predicted dividends to their present value. For the model, I have utilized a weighted average cost of capital (WACC) of 5.8. The WACC selected for this model is in line with other estimates. For the dividend growth rate over the coming year, I selected a growth rate of 3.2% which is less than the historical average and analyst’s expectations and is in line with the dividend the company expects to pay this year, which reflects my conservative approach towards valuing companies. Based on the DDM, I have estimated an intrinsic value of $53.98 which is 94% above the current price, an attractive opportunity for investors. Based on this valuation, and the potential upside available to investors, I believe that CAG is a buy at current prices.

Risks To Consider

I’m a bit cautious about Conagra Brands’ high level of debt after acquiring Pinnacle Foods. Following the acquisition, the company took on an amount of debt which resulted in a downgrade by Moody’s. Although Conagra has been working on reducing its debt and aims to reach its target for debt/EBITDA, I think it’s crucial for them to strike a balance between leveraging for growth and maintaining flexibility. Having debt can limit their ability to adapt quickly, especially when borrowing costs are on the rise like they are currently. Moreover, operating in the consumer-packaged goods industry exposes Conagra to fluctuations in commodity prices and consumer preferences, which adds another layer of risk. This financial strategy could lead to fluctuations in the company’s cash flow, potentially reducing the funds available for paying off their debts.

Takeaway

I personally find Conagra to be a promising investment opportunity, mainly due to its consistent dividend performance. Its payout ratio of 65% and dividend yield of 4.97% are strengths, especially when compared to companies in the same industry. Despite facing some challenges in the past, Conagra’s strong brand and steady sales growth show its ability to overcome obstacles effectively, which I think paves the way for dividend increases. Additionally, its significant market presence and focus on innovation indicate an outlook for growth. Based on a DDM valuation, the company’s intrinsic value is estimated at $53.98, significantly higher than its price by roughly 94%. From my analysis, it appears that Conagra is currently undervalued, making it an appealing option for investors looking for both income and growth opportunities in their investment portfolios.