Conagra’s 3% Yield Is A Steal At Today’s Prices

A Weak Q3 But …

Conagra Brands (CAG) reported earnings yesterday and missed expectations. The company reported a-5.5% decline in YOY revenue, missed the consensus by more than 100 basis points, and yet the shares surged on the news. The fiscal third quarter was weaker than expected but those results don’t paint the full picture.

Commentary and guidance offered by the company boils down to this. Conagra’s push to streamline its portfolio has put it in a good position to benefit from pantry-loading. The global coronavirus pandemic is spurring a shift in consumer habits that are boosting demand. Although the 3rd quarter was weak, business trends for the 4th quarter point to revenue and EPS coming in well above expectations. The outlook is so good, in fact, Conagra execs expect to exceed its own full-year guidance.

CEO Sean Connolly ...

“While we are still early in our fourth quarter, we have seen significantly elevated demand for our retail products as consumers have started filling their pantries for more at-home eating. On a quarter-to-date basis, shipments and consumption in our domestic retail business have increased by approximately 50%, which has more than offset the impact of worsening trends in our foodservice business. Our teams have remained agile in responding to the elevated demand, and our supply chain has performed extremely well to fulfill customer orders.”

An Outlook For Growth And Declining Debt

Conagra was expecting revenue for 2020 to come in flat to up 0.5% on an organic basis and about 10% net. The new guidance expects both figures to exceed the high-end of their ranges and produce earnings growth in excess of 3%. Looking forward, the analysts are expecting revenue and EPS growth to accelerate in 2021 and continue rising for the next three to five years.

Earnings are being put to good use, other than paying a nice dividend. The company has a plan to reduce debt that includes deleveraging to a healthier 3.5X free cash flow from the current 11.79. The company reduced debt by $450 million in the last quarter and remains on track to hit its December 2021 target. Cash flow remains strong and free-cash-flow is running near 60% so there is little fear the deleveraging plan will get off track.

Not Exactly A Dividend Aristocrat But …

It is no secret I like the Dividend Aristocrats but that doesn’t mean non-Aristocrats aren’t good buys too. Conagra may not qualify as an Aristocrat, it is an unreliable increaser of its distribution, but it does have a good history of past increases. The company has only increased the payout since 2006 and made seven increases in that time. As good as this news is though, it’s not really why you buy this stock.

At today’s prices, Conagra is paying a very safe 3.0% and trading at a discount. Conagra’s 14X forward earnings are below the broad market average and most of its peers. Lamb Weston (LW), Campbells (CPB) and Mondelez (MDLZ) trade 17.5X to 19X forward earnings while Kellog (K) and General Mills (GIS) trade closer to 16X earnings.

With the growth in the forecast, this suggests a multiple expansion could boost total returns as much as 10% to 30%over the next quarter alone, and that doesn't count the dividend.  Longer-term, Conagra is exhibiting signs of reversal that suggest its correction is over.

The Technical Outlook: A Reversal In Progress

The chart of Conagra is another one to give me hope, hope the market hasn’t completely lost its mind and still recognizes a good value. Shares of Conagra corrected along with the broad market but that correction may be over. Price action is forming what looks like a pretty recognizable Head & Shoulders Pattern to me and the pattern appears to be confirming a bullish reversal.

The shoulders of the pattern are in late February and late March with a mid-March head. The neckline is in the $28 to $29 range and, notably, price action has broken above this level. Today’s trading has price action testing and bouncing from the neckline which is an early sign the pattern is confirmed. Because the indicators are in support of upward movement I consider this to be a fairly strong buy signal. The next hurdle is resistance at the $30 level; if that falls a move to $32 and then $34 is likely.