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Thursday was a brutal day for the market. The Dow Jones Industrial Average fell over 170 points. But ConAgra Foods (NYSE: CAG) was a notable outperformer. The packaged foods giant ended the day up more than 1%, thanks to a better-than-expected fiscal third-quarter earnings report.
The past year hasn’t been a good one for the company, from a business perspective. ConAgra suffered a significant decline in sales for an extended period, due to eroding demand for its shelf-stable and frozen foods. Consumers, particularly in the U.S., are increasingly flocking to fresher foods, like organics.
But ConAgra’s stock performance is a totally different story. ConAgra stock is up 22% in the past one year, and has significantly outperformed the S&P 500 in that time.
ConAgra Earnings: Not Much Sizzle
Once again, there didn’t seem much to be excited about from ConAgra’s report. Sales were flat, while earnings per share from continuing operations fell 16% year over year.
ConAgra’s consumer foods segment posted a 2% sales decline, based on a 4% drop in volumes. This division is home to its flagship Healthy Choice, Orville Redenbacher’s, and Chef Boyardee brands. Unfortunately, these brands continue to perform weakly, as consumers are shying away from shelf-stable and frozen foods.
But you wouldn’t know this, judging by the stock price performance. Investors seem comfortable with ConAgra’s progress, based in large part on the company’s ability to surpass earnings estimates.
For the quarter, total sales of $2.92 billion beat the average analyst estimate of $2.86 billion. ConAgra has had little trouble clearing the bar set by analysts each quarter, even though the bar is set fairly low. That is why the stock has done so well over the past year.
Still, it’s hard to see the reason for such a high level of optimism. ConAgra has been trying to turn itself around for several years now, and to its credit, it has done a good job paying off the debt incurred from the disastrous $5 billion acquisition of private-label brand Ralcorp Holdings.
Investors appear optimistic about ConAgra’s major restructuring plans. Upon completion of the Ralcorp sale, the company intends to use the proceeds to reduce its debt by $2.15 billion.
But again, it’s hard to get too excited by this news. After all, ConAgra bought Ralcorp for $5 billion, only to sell it for $2.7 billion two years later.
ConAgra also plans to spin off its Lamb Weston frozen potato products business, and reduce its office-based workforce by 30% to further cut costs.
But it’s still not able to grow sales at a satisfactory rate, a trend that has persisted for several quarters in a row.
Valuation Is Hard to Swallow
ConAgra is a solidly profitable company, and it has shown significant improvement in its turnaround. However, whether the stock should be bought is a different question—one could argue the stock is too expensive at these levels.
Management expects the company to earn $2.06 per share in adjusted profit in 2016. Based on its $46 stock price, shares are valued at a lofty 22 times forward earnings. This valuation is a little hard to swallow, based on the fact that the company still isn’t growing sales. Moreover, the stock is more richly valued than the S&P 500 by a wide margin.
One factor working in ConAgra’s favor is its dividend. The company pays a $1 annualized dividend, which comes out to a 2.1% yield. In today’s low interest rate environment, investors are starved for yield, and are hunting for income anywhere they can find it. ConAgra, despite its operating challenges, is a stable food company. Investors feel confident in the security of its dividend, and don’t mind paying up for reliable income.
The good news is that ConAgra can satisfy your hunger for yield. The bad news is, the company’s financial performance could underwhelm for several more quarters, as it continues to work through its turnaround.
12 Straight Months of Dividends
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.