In this screen we chose to only consider stocks in the Food Processing Industry. This is a mature sector that loosely tracks underlying demographic trends, such as population and income growth. Companies generate revenue from the sale of food and ingredients to a whole host of customers, ranging from supermarket chains and local bodegas to restaurants and other players further down the processing chain.
This sector is praised for its ability to deliver consistently positive investment returns. Indeed, over the past 20 years, Food Processing stocks have, on average, delivered high single-digit annual total returns (share-price appreciation and dividends), with much less volatility than the broader market indexes.
It is, therefore, of little surprise that food stocks are well suited to fairly conservative investors with low tolerances for share-price volatility. Defensive characteristics, including stable growth, ample interest coverage, and solid balance sheets, also establish these companies as "safe harbor" selections during major economic and stock market downturns.
The parameters of the screen are fairly simple. In addition to only including those equities in the Food Processing Industry, we also made sure they were either ranked a 1 or 2 for Safety (our highest ranks). Next, we required that the equities pay a dividend yield above 2.5% and have a Financial Strength Rating of B+ or better. The list of stocks that made the cut can be seen below. Here, we highlight General Mills, Inc. (GIS) and ConAgra Foods, Inc. (CAG).
General Mills Inc.
General Mills processes and markets consumer foods. U.S. retail sales accounted for 60% of revenues in fiscal 2013, while international comprised 29%, and bakeries and foodservice made up the remaining 11%. The company has several well-known brands including Cheerios, Wheaties, Total, Chex, Betty Crocker, Bisquick, Hamburger Helper, Yoplait, and Progresso. The company owns 50% of Cereal Partners worldwide along with Nestle SA (NSRGY).
On the heels of a moderate bottom-line improvement in fiscal 2014 (ended May 25th), we look for General Mills' earnings to gain further traction over the next 12 months. However, we are a bit cautious regarding the quality of earnings, as the company continues to struggle on the revenue side, particularly with regard to cereal and yogurt sales. Much of the full-year earnings growth we envision in the year recently begun will probably be fueled by cost cutting, lower interest expenses, and elevated levels of share repurchases. What’s more, the company has been aided by lower input cost inflation. That said, we do look for some improvement in the cereal and yogurt groups over the latter part of fiscal 2015, enhanced by product introductions and increased sales to emerging markets.
Worth noting is that the Yoplait yogurt line has been quite disappointing. Industry leader Chobani’s aggressive expansion and promotional spending has hindered the Yoplait Greek yogurt line, though it has started to gain some acceptance, helped by product introductions. However, we believe it could be several quarters before this segment is profitable.
These shares may be worthy of consideration for conservative accounts. They carry our Highest (1) Safety score and their dividend yield is markedly above the Value Line average. We look for further increases in the payout in the years ahead, given probable strong cash flow from operations.
ConAgra Foods is a leading packaged foods company serving grocery retailers, as well as restaurants and other foodservice establishments. Popular consumer brands include Chef Boyardee, Healthy Choice, Orville Redenbacher, Slim Jim, Reddiwip, Hebrew National, Egg Beaters, and Hunt’s. It operates through three divisions: Consumer Foods, Commercial Foods, and Private Brands. ConAgra acquired Ralcorp Holdings in January of 2013.
ConAgra announced fiscal fourth quarter results for 2014 of $0.55 a share, which was sharply below our estimate and the prior-year tally. The main reason for the unexciting performance was lower-than-expected sales in the consumer foods unit, notably for its private label offerings. This is not a complete surprise to us, as most of the damage was done by products acquired in the Ralcorp Holdings deal. Those lines were struggling for Ralcorp and have not shown the type of improvement ConAgra had expected thus far. The recent struggles of the Ralcorp business have raised concerns as to whether ConAgra paid too much to purchase these units. Conagra’s offer for the businesses was rebuffed a few times, and thus it had to raise its bid. Despite the premium it paid for these units, we believe it made sense from a strategic viewpoint. We still think the Ralcorp businesses will pay off for ConAgra in the long run, but the road to profitability will take some time, particularly on the marketing side.
These high-quality shares (Safety rank of 1: Highest) might be of interest to conservative investors seeking current income. We look for the company to continue paying out a decent portion of its profits to shareholders, which should lead to solid annual dividend growth 3 to 5 years hence. In fact, the company has raised its dividend each year since 2007, and its yield remains well above the average equity under our review. Stock Price Stability is also stellar (100 out of a possible 100).
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At the time of this article's writing, the author did not have positions in any of the companies mentioned.