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January 30, 2006
A Tasty Treat for Investors
There’s nothing like a slice of Sara Lee pound cake top with fresh strawberries and whipped cream. (Can you tell it’s nearly lunchtime here in Chicago?) Let’s face it though, that tasty treat is only going to help fill out my waistline, not my retirement portfolio. Or could it?
Sara Lee, maker of other yummies like Ball Park hot dogs and Jimmy Dean sausage, announced a $0.1975 per share quarterly dividend late last week. That amounts to a dividend yield of 4.3%, more than twice that of the S&P 500. In this stock market environment where returns are likely to be in the single digits that payout is pretty sweet.
Of course, I may be in the minority in liking Sara Lee stock these days. The company is knee deep in a massive restructuring plan designed to spark earnings growth and get the stock out of a five-year rut. At the heart of the strategy is a renewed focus on marketing and innovation and an effort to turn a disparate conglomerate of mini fiefdoms into a streamlined, centralized team. CEO Brenda Barnes has her hands full. Currently, she’s in the process of selling or spinning off some 40% of the company’s revenue base, while at the same time trying to prove to Wall Street that Sara Lee can make products that consumers will value over rivals and generic brands.
CEO Brenda Barnes
So far Wall Street ain’t buying it. The stock is down roughly 20% to $18.50 since the plan was announced in early 2005. That puts it at the low end of its five-year trading range. But to a contrarian like me that makes Sara Lee even more appealing. I figure it’s always worth taking a closer look at a stock that practically everybody considers a dog with fleas. And as I see it, much of the bad news is already baked into the stock price of Sara Lee. So just one piece of good news could send Sara Lee soaring, or at least moving in the right direction. There’s no doubt it’s a risky bet. But as long as they maintain the hefty dividend—which so far, Sara Lee seems committed to—investors are getting paid to be patient.
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I don't think that investing in dogs with fleas is a good plan for investors. If a stock has dropped in price due to some piece of news that has no fundamental impact, then a stock may be purchased at a discount.
However, let's take a little look at your canine investment. If we review the Morningstar.com "5-Yr Restated" financials we can derive some fundamental observations on this stock.
In 2003 SLE reported revenue of $17.9 billion. Revenue growth has been flat and is even down a bit in the trailing twelve months from $19.3 billion to $19.2 billion.
Earnings actually peaked at $2.65 in 2001 and have been moving lower to the current $.55/share in the trailing twelve months. Meanwhile, the company is paying $.79/share in dividends.
Free cash flow which peaked at $1.5 billion in 2004, has now dropped to $909 million in the TTM, which is a bit higher than the 2005 level.
The balance sheet shows $1.6 billion in cash and $5.4 billion in other current assets. This is enough to cover the current liabilities of $6.6 billion, but not enough to impact the $6.5 billion in long-term debt.
Taking a look at the latest latest quarterly result, we find that on November 3, 2005, Sara Lee reported an 81% drop in first quarter profits with a 2% drop in revenue. In my view, not exactly a recipe for a rich dessert for investors.
Upcoming quarters may indeed be more attractive as the company slims down.
I find it wiser for an investor to look at a company like Medtronic (MDT) which on November 16, 2005 reported 2nd quarter 2006 results which included a 52% increase in income on a 15% increase in revenues.
The company also pays a smaller dividend of $.39 yielding .70%.
Unlike SLE, when we look at a Morningstar.com "5-Yr Restated" financials report, we find that revenue instead of stagnating has increased from $5.6 billion in 2001 to $10.1 billion in 2005 and $10.8 billion in the TTM.
Meanwhile, earnings have increased from $.85/share in 2001 to $1.48 in 2005 and $1.54 in the TTM.
Dividends have also been growing with $.20/share reported in 2001 increasing to $.36 in the TTM.
The balance sheet also reflects the healthier position of this company with $4.2 billion in cash and $3.9 billion in other current assets, more than enough to cover both the $4.9 billion in current liabilities and the $1.7 billion in long-term liabilities combined.
This is the kind of stock that deserves to be in retirement accounts and long-term investment strategies.
Certainly SLE may turn out to be a better investment over the short-term, but investors shouldn't be speculating about turn-arounds and canine attractions. They should concentrate on the highest quality stocks available, and quality means steadily increasing revenues, earnings, dividends, and a healthy balance sheet.
Posted by: Robert Freedland at January 30, 2006 03:24 PM
The first time I was introduced to Sara Lee products I was a child of about 8 which puts it over 40 years ago. It was at a newly married cousin's house and my mother's comment was that Sara Lee was to expensive for her to buy. So in the ensuing years I had regarded Sara Lee as an expensive top of the line dessert. Then when one of my contemporaries married she jokingly told her husband that her cooking skill with desserts had come from her mother's family Sara Lee because everything she served was an already prepared mode. That was 25 years ago.
So now I look at Sara Lee and buy the poundcake for an occasional recipe with fresh ingredients and feel I am betraying the recipe's intention.
Most of the frozen products are a throw back of days of yore when elegant desserts as creme brulee floating island and semi fredo were unknown to the American palate. My son is a pastry chef trained at CIA and these are now common desserts of the American palate.
Sara Lee should upgrade to frozen moulton cakes and such to meet the trend.
Jimmy Dean and sausage exists on his yaht only. American quest for ideal weight does not include a sausage patty no matter its convenience or decent taste.
Ball Park franks are the only saviour here.
Also my one memory of Sara Lee's venture into cold cuts was that they were recalled.
So if Sara Lee does not update its product line it will be bought up and probably kaput.
Posted by: Elaine McKenzie at February 21, 2006 08:38 AM