Conagra Brands: Offering A Secure And Growing Dividend

seekingalpha04-25

Conagra Brands, Inc. posted Q3 earnings with a beat on the bottom line and in line with top-line expectations.Like any packaged food company, they have been dealing with declining volumes and higher ...

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Conagra Brands, Inc. (NYSE:CAG) posted their latest Q3 earnings results a couple of weeks ago, which came in with a beat on the bottom line and were in-line with the top-line expectations. This was the 9th quarterly EPS beat in a row, and the company beat 15 out of the last 16 quarters. Revenue estimates have been a bit more mixed. The latest in-line results compare to 12 quarters of beats and 4 quarters of misses over the last 16 quarters. CAG is a packaged food company that has continued to deal with declining volumes in the face of higher inflation and ramping up prices to cover those higher costs of goods. However, CAG isn't alone; most packaged food companies have to deal with the same scenario of declining volumes. Two of the notable exceptions in this competitive space were PepsiCo (PEP) and Mondelez (MDLZ). That said, after their previous earnings, they had even seen volume start to slip. With inflation remaining sticky and now getting a third hot CPI report in a row, it means we aren't out of the woods of this difficult operating environment just yet. Admittedly, I don't know when we will be, nor can anyone predict the future. However, CAG remains value-priced even after seeing strong total return results since our update for the previous quarter.   CAG Performance Since Prior Update (Seeking Alpha) An attractive valuation, combined with a strong and growing dividend, continues to make CAG an interesting opportunity today. Q3 Recap EPS was $0.69 for the third quarter, and revenue was $3.03 billion, marking a slight decline of -1.7% year-over-year. Shares popped on this news, but a hot CPI report knocked the share price back down more recently—as it had with the broader market. Analysts are expecting a small decline in earnings for fiscal 2024. The earnings expectations are $0.02 higher than our previous update, when analysts were looking at $2.60 for this FY. For 2025, expectations only ticked marginally lower by $0.01, as did 2026.   CAG Earnings Estimates And History (Portfolio Insight) For CAG, we have one more quarter to go, and since the EPS of $0.69 was down from $0.76, we are on track to see that soft decline. In total, they've delivered $2.06 in EPS so far in the first nine months of their fiscal year. That gives them a pretty soft $0.56 EPS left for Q4, which seems like it should be doable for the company. For revenue, the hit there is expected to be a bit softer.   CAG Revenue Estimates And History (Portfolio Insight) On the volume front—that is, the number of food items they are selling—we are still seeing a decline in the latest quarter. That said, we are really starting to see that volume decline moderately as we come up to easier comp numbers.   CAG Net Sales Change Bridge (Conagra) The company continues to have strong, dominant brands, primarily in the refrigerated and frozen department. They've been able to take away unit share in this category.   CAG Frozen Unit Share (Conagra) One reason for this could be that they actually showed an 8.1% decline in organic net sales. The price mix decreased by 4.8%, and volume also sunk by 3.3%. This was the result of \"strategic investments,\" basically taking prices down due to deflation in some categories and heavier sale prices. In particular, they noted that refrigeration is experiencing deflation, which may be a bit difficult to believe, considering we just hit another hot CPI report. Recall, our Refrigerated businesses are predominantly pass-through categories and one of the rare areas in our portfolio where we've actually experienced deflation and rolled back prices accordingly as pass-through categories do. And while that creates some short-term volatility in dollars until it's in the base as deflation passes through. Importantly, margins are preserved due to the lower COGS. Sometimes, you have to lose a bit of money to be more competitive and get your product in front of consumers. Elsewhere in the company's portfolio, the grocery and snacks category remained robust, having now eclipsed the refrigerated and frozen category. This was also a reverse from the Q2 net sales decline we had previously seen, which is showing some hopeful signs of recovery now. International also showed some glimmers of hope, seeing some growth - though moderating from the previous quarter's 5.6% increase. As a much smaller overall category for the business, it doesn't necessarily move the needle too much.   CAG Net Sales Per Category (Conagra) Margins took a soft hit due to the R&F category's overall decline, which dragged down the entire company. This was partially offset by productivity gains, but overall margins YoY went from 16.9% to 16.4%. On the positive side, quarter-over-quarter, operating margins improved from the 15.9% previously.   CAG Operating Margin Bridge (Conagra) Dividend Looks Secure And Set For Growth There were additional positives from the quarter that impacted the dividend in terms of its safety: surging free cash flow and a declining net leverage ratio. Debt remains a key focus for this company as it deleverages, and it's been delivering on that front.   CAG Free Cash Flow And Net Leverage (Conagra) Net leverage is down to 3.44x from 3.65x last year. Last quarter, it was at 3.55x, which itself was down from 3.90x. This company's total debt went from $9,251.5 billion to $8,677.3 year-over-year, also a reduction from $9,360.2 billion. This is something I've been watching as actual total debt is declining. A company can retain a bunch of cash on the balance sheet and simply say net debt is being reduced, but CAG is actually paying down debt as well as increasing its cash balance. A stronger balance sheet obviously leaves much more flexibility going forward, as a higher rate environment for the foreseeable future seems nearly certain with these hot inflation reports. The free cash flow listed for the first nine months of the year shows a ~180% year-over-year increase. This is also $581 million higher than the $641 million listed in the first half of the year. Total free cash flow, or FCF, for 2023 came to $633, meaning that we are already seeing a near doubling of this company's FCF this year. EPS is generally a fine metric to use in terms of seeing if a company can cover its dividend, but everyone knows it really is all about the cash the company is generating at the end of the day.   CAG Dividend History (Seeking Alpha) The company's latest dividend works out to $1.40 per share annually, which comes to a forward estimated EPS payout ratio of 53.44%. Based on the shares outstanding of 478.8 million and the $1.629 billion FCF run rate, we'd see FCF per share of $3.40. That would ultimately work out to an FCF payout ratio of ~41%. If they never earn another single dollar of FCF this year, FCF per share would work out to $2.55, or what would still be a FCF payout ratio of just shy of 55%. I believe this puts them in a strong enough position to continue to feel comfortable raising their dividend, or at the very minimum, maintaining it while being able to pay down debt. As they further pay down debt, we should continue to see a rising trend of FCF, which becomes a virtuous cycle. Conclusion While the company certainly is still facing a challenging environment—and that doesn't look to be over yet as inflation has remained stubbornly sticky—there is some real progress with the latest quarter. The massive volume declines are moderating, and some pockets of deflation are being seen. The valuation here still suggests that CAG is trading at a deep discount.   CAG Fair Value Range (Portfolio Insight)  Analysts expect a slight decline in Conagra Brands, Inc. EPS this year, but then a return to growth thereafter. That should keep the dividend secure going forward and leave capacity for further growth as the company continues to throw off a ton of FCF.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430461913"}