3 Reliable Growing Dividends Near Rock-Bottom Prices

Key Points

• McCormick & Company fell 10% on solid results and increased profit guidance.
• Conagra Brands offers deep value and high yield. 
• Lamb Weston provides a lengthy runway for distribution increases. 

The consumer staples sector is getting beaten up in the 2nd half of 2023, and for no other reason than the sector is boring. It's growing but not quickly; it's not outperforming, but it has been widening margins and driving cash flow, which is of interest. Widening margins and improving cash flow are good news for income investors but not a catalyst for these stocks today. 

The takeaway is that the consumer staples sector and many of its stocks offer a generational opportunity for value-oriented income investors with a few years until retirement. The opportunity is buying into a blue chip sector while trading at multi-year lows and paying above-average yield for a high-yielding sector. 

McCormick & Company Falls On Growth, Solid Outlook

McCormick & Company NYSE: MKC shares are down about 5% ahead of the open following a solid Q3 report. The report included mid-single-digit top-line growth and better-than-expected margin driven by volume and price. The company reports strength across regions, with China as the only area of softness. The recovery in China is slower than anticipated but still gaining traction. The bad news is that revenue was slightly more than 100 basis points short of the analysts' consensus, leaving the market wanting more. 

Margin news is good but not enough to offset the early pullback in price action. Margins contracted compared to last year on a GAAP and adjusted basis, but even the adjusted results include 1-offs that make the decline less than comparable. Regardless, earnings are as expected compared to the top-line miss, showing some strength. The strength is also seen in the guidance reaffirmed at the top line and increased at the bottom.

MKCs results are detrimental to the stock price, but the impact will likely be short-lived. The results confirm that this 2.25% yielding Dividend Aristocrat is growing and can sustain future dividend increases. The pullback in share prices trims a bit off the valuation, which is high for this group. Trading near $70, this stock is at critical support and deeply oversold, a condition that has resulted in previous rebounds. 

Conagra Brands Could Rebound On Solid Results

McCormick's results suggest that other packaged food names, such as Conagra Brands NYSE: CAG, will also post solid results. In the case of Conagra, the analysts expect results to be flat sequentially and up YOY despite a series of downward revisions. However, the revisions may have set the bar too low, setting the company up for outperformance on top of growth. The stock is trading at a significant support target after a deep correction, so the stock could post a significant rebound over the next few quarters. 

Conagra offers one of the best value-to-yield combinations in the consumer staples sector, trading at less than 10X earnings and paying more than 5.2%. The payout is reliable at less than 50% of earnings, and earnings growth is expected to resume. This combination may attract new buyers; analysts are Holding the stock and see it increasing by 20% at the low end of their range. 

Lamb Weston has Solid 2023, Guides for Strength in 2024

Lamb Weston NYSE: LW is a middling value within the consumer staples sector, trading near 17X earnings. You get one of the lowest dividend yields, about 1.2%, and the most robust outlook for distribution growth. This company has paid its distribution for only a few years but is on track to reach the Dividend Aristocrat level in time. The payout ratio in F2023 was less than 25% of earnings, with earnings growth projected at an above-sector pace for 2024. In this light, Lamb Weston can sustain its 7% annual distribution growth without significantly affecting the payout ratio, lengthening the runway for future distribution increases.