Packaged meals giants Conagra Manufacturers (CAG 1.18%) and The Campbell’s Firm (CPB 0.75%) are each down greater than 25% yr so far and are hovering round their lowest ranges in over a decade.
Each corporations are business giants. Conagra owns manufacturers like Orville Redenbacher’s, Slim Jim, Increase Chicka Pop, Hunt’s, Reddi-Wip, Marie Callender’s, and extra. Along with its flagship soup line, Campbell’s additionally owns quite a lot of pasta sauce and dip manufacturers, in addition to snacks like Pepperidge Farm, Kettle, Cape Cod, Snyder’s of Hanover, Lance, Goldfish, and extra.
Conagra and Campbell’s shares are so overwhelmed down that they yield 6.8% and 5.1%, respectively.
This is why the sell-off in each high-yield dividend shares is a shopping for alternative for affected person traders.
Picture supply: Getty Photos.
A extreme slowdown
The packaged meals business has confronted quite a few challenges lately. Most just lately, pullbacks in client spending and inflation have pressured client items corporations — however the downturn is especially dangerous for packaged meals names.
Packaged meals corporations are going through macroeconomic headwinds and modifications in client conduct. A shift away from processed and packaged meals towards more healthy choices presents a major problem for the business. Particularly from corporations that promote frozen and processed meals fairly than simply snacks and drinks.
The Trump administration established the Make America Wholesome Once more Fee to handle U.S. well being issues. In April, the U.S. Division of Well being and Human Companies and U.S. Meals and Drug Administration introduced measures to section out all petroleum-based artificial dyes and change them with pure components.
On June 25, Conagra introduced that it will take away Meals, Drug & Beauty (FD&C) colours from its U.S. frozen product portfolio by the tip of 2025. The corporate additionally said that it’s going to not provide merchandise with FD&C colours bought to Okay-12 colleges starting with the 2026 via 2027 college yr and can discontinue the manufacturing of merchandise with FD&C colours in its U.S. retail portfolio by 2027. Conagra’s friends, like Common Mills, Kraft Heinz, and others, made comparable bulletins in June.
The regulatory strain throws a wrench in an already difficult working surroundings for the business, however it may very well be a internet constructive in the long term.
Acquisition regret
Along with macro challenges and paradigm shifts within the business, some packaged meals corporations have additionally been coping with the aftermath of dangerous acquisitions.
In 2018, Conagra purchased Pinnacle Meals for $10.9 billion — a disastrous transfer in hindsight, given the market cap of Conagra on the time of this writing is simply $9.7 billion. That very same yr, Campbell’s purchased Snyder’s-Lance for $6.1 billion — making the corporate a serious participant within the snack class via chips, pretzels, popcorn, nuts, and cookies.
Campbell’s then purchased Sovos Manufacturers for $2.7 billion in March 2024 to diversify its product lineup via pasta sauces, dry pasta, frozen entrees, frozen pizza, yogurt, and extra soup varieties. The acquisition is not horrible, because it opens the door to extra premium manufacturers. Nevertheless it did add debt to Campbell’s stability sheet. Having to handle a bigger curiosity expense makes it even more durable for the corporate to navigate industrywide challenges.
Mixed, these two acquisitions value Campbell’s $8.8 billion, almost as a lot as its market cap on the time of this writing of $9.2 billion. Like Conagra, Campbell’s overpaid for these manufacturers in hindsight.
Conagra’s and Campbell’s revenues have steadily climbed over the previous few years, however that is primarily on account of acquisitions — not natural progress. In the meantime, working margins have considerably fallen on account of weakening demand.
CAG Income (TTM) information by YCharts
In response to the poor outcomes, each shares are actually at their lowest ranges in over a decade, which has boosted their dividend yields to their highest ranges in that interval.
CAG Dividend Yield information by YCharts
Two high-yield shares at engaging valuations
As dangerous as Conagra’s and Campbell’s outcomes have been, each corporations stay impeccable money cows.
Conagra’s free money stream (FCF) per share is $3.02 in comparison with its $1.40 dividend per share, whereas Campbell’s has $2.41 in FCF per share in comparison with a dividend per share of $1.52. So though each corporations are experiencing weakening stability sheets, no less than they’ll nonetheless help their dividends with money from the enterprise.
By way of valuations, each shares are filth low-cost — with Campbell’s sporting a 12.8 price-to-FCF and 10.5 ahead price-to-earnings (P/E) ratio in comparison with only a 6.8 price-to-FCF ratio for Conagra and an 8.3 ahead P/E.
For context, Campbell’s 10-year median price-to-FCF ratio is 15.8 and Conagra’s is 16.3 — illustrating simply how severely discounted these shares are in comparison with their historic averages.
Conagra and Campbell’s have fallen far sufficient
Conagra and Campbell’s have been hit with a four-pronged punch of self-inflicted poor decision-making, shifts in client conduct, macro challenges, and regulatory modifications. Nonetheless, each shares are filth low-cost and generate loads of money to help their excessive dividends.
Conagra studies earnings on July 10, which is able to give traders a greater concept of the place the corporate is headed and the impression of modifications to its meals components and components.
At their lowest ranges in over a decade, now is an effective time for earnings traders to scoop up shares of Conagra and Campbell’s regardless of each shares being closely out of favor.
