Conagra vs Campbells: Yield or Value, Both Are A Buy

Packaged Foods Are Hot

Within the consumer staples arena, packaged foods are among the hottest items. When it comes to pantry loading shelf-stable items are key. In this light, it is no wonder that Conagra Brands (NYSE: CAG) and Campbell Soup Company (NYSE: CPB) have both seen bullish activity in recent months. Now, with the spread of COVID-19 reaching new records daily, trends within consumer staples and packaged foods are going to grow legs if not also intensify.

The question now is, which is the better buy? Or even, is one a better buy than the other because on paper they share a lot of similarities. When you boil it all down what you are left with is a decision between yield and value. If you want a little higher yield one stands out as the clearer choice, if you are looking for a better value in hopes of boosting your total returns the other is the better choice. Bottom line though, both are great companies and well-positioned for the coming years.

The Dividend, As Sound As They Come

Both companies pay a dividend and both are about as sound as you can get. Payout ratios are low, both have a history of increase if not a history of regular sustained increases and both are backed up by near-fortress balance sheets. In terms of the payout ratios, Conagra is the better of the two. Conagra is paying only 35.70% of its earnings to shareholders while Campbell is paying closer to 48%. In terms of history, both have a single dividend decrease (both long in the past) mitigated by semi-regular increases in the time since.

As for the balance sheets, both companies are well-capitalized. Both companies carry some debt but neither very much. The debt to capital ratios both run in the 50% range with high coverage to obligation ratios and plenty of cash. The difference, aside from the yield, is that Campbell’s is more levered but there is a reward. Campbell’s pays about 2.85% while Conagra only 2.40%.

The Earnings Outlook

The earnings outlook for both of these companies is a mixed bag at best until you come to the conclusion that I have. The analyst’s outlook for longer-term revenue and earnings have not been adjusted to match current results. Campbell’s is slated to report it’s 4th quarter results soon, calendar 2nd quarter, and the consensus for the quarter plus the YTD results mean the company will SMASH the FY consensus. Conagra has already reported it’s 4th quarter, the two companies’ fiscal years are offset by two months, and its 4th quarter took the FY results well above consensus.

Looking forward, I expect to see both companies continue to produce solid gains through fiscal 2021. The comps won’t get hard until the 4th quarter and even then a flat comp to this year is still pretty good business. Regardless, I expect to see the analyst begin reassessing their targets for the year very soon. Conagra has seen a slight improvement in sentiment over the last 30 days, Campbell is yet to catch up.

The Technical Outlook: The Leader Is The Better Value

While Campbell’s has a better yield and an equally positive outlook for revenue, dividend health, and future increases it is lagging Conagra Brands on a YTD basis. In addition, Conagra Brands presents better value trading at 15X 2021 earnings compared to Campbell’s 17X. Conagra also just set a new post-pandemic high while Campbell’s continue to languish within a range. There is a chance Campbell’s will pop again, but I prefer Conagra in this match up.