Conagra Brands (NYSE:CAG) Is A Must-Buy For Dividend Growth Investors

Conagra Brands Knocks It Out Of The Park

Conagra Brands (NYSE:CAG) has long been a favorite among favorites. The consumer staples sector isn’t a headline-making sector but it is one that pays steady dividends and most stocks have at least some expectation of dividend growth. Within the group, there are value plays, high yield plays, turnaround plays, and growth plays and Conagra Brands is all of that.

The company spent the last few years trimming down the portfolio to focus on its core, premium labels, and that effort paid off. When the pandemic hit the company was well-positioned for stay-at-home trends and there is no sign of it letting up. Conagra Brands labels include but are not limited to Birds Eye, Banquet, Sim Jim, Vlassic, Dukes, Fronterra, and Chef Boy Ardee.

Conagra Raises The Dividend

Conagra released its calendar 3Q/fiscal 4Q earnings report this morning and confirmed what I have been seeing within the group all year; conditions support aggressive dividend growth. The company declared its latest distribution and raised it for the first time in three years. The increase is more than noteworthy for its size, just shy of 30% a move that increases the yield to just over 3.0%. Looking at the metrics, the payout ratio goes up as well but only by 400 basis points and is still running below the 40% mark relative to this quarter’s earnings. I’ll get to that in a minute, the salient point here is the new dividend is attractive, safe, and has an outlook for future growth.

Conagra Brands Beats, Guides Higher

The 4th quarter was a good one for Conagra Brands. Total revenue grew 12.1% to $2.28 billion. This is $0.07 billion better than expected and driven by strong organic sales growth. Net organic sales growth topped 15% versus the 10.9% expected by the analysts. The bottom line results are even better. Adjusted EPS came in at $0.70 or $0.13 better than estimated. In terms of growth, the 4th quarter EPS grew by 62%.

On a segment basis, the company says it saw margin growth in all four primary segments. Within that, the company saw “significant net sales growth in all three retail categories”. At the company level, the net margin grew 800 basis points over the last year while operating margins increased by 450.

The EPS is important because it is worth 30% of the FY guidance and the guidance has been increased. The company is expecting fiscal 2nd quarter adjusted EPS in the range of $0.70 to $0.74 versus the consensus $0.71. What this means is that not only are we to expect another round of analysts upgrades for earnings etc, trends suggest the company could raise or beat its own guidance before the end of the quarter.

Looking to the balance sheet, the company is using its earnings well, not just giving money back to shareholders. The company says it has been paying down debt and will reach its targeted 3.5 to 3.6X leverage ratio by the 3rd quarter of fiscal 2021. That’s just two quarters away.

The Technical Outlook: Conagra Brands Is About To Melt Up

A melt-up is defined as a rapid upswing in prices driven by an equally rapid improvement in outlook. And that’s what we have. Conagra was expected to do well in the quarter but these results are not only good, but they’re also better than expected and come with improved guidance. Along with that is an increased dividend to attract new bulls and that has shares up 2.5% in the pre-market session. The move has price action above the short-term moving average and supported by the indicators.

There might be a pull-back in prices to test support, possibly as low as the EMA near $36, but I wouldn’t count on it. Even with today’s jump, the stock is still trading at only 15X earnings while other high-quality consumer staples names like Hormel (NYSE:HRL), McCormick (NYSE:MKC), and Mondelez (NASDAQ:MDLZ) are all trading at a significantly higher valuation