A Dividend Too Rich To Last?

Is any big stock today more hated than ConAgra Foods (CAG )? Are many as tempting? None of the nine analysts tracking this maker of Healthy Choice dinners and snacks, Butterball turkeys, and more rates it a buy. At the same time, ConAgra offers a 4.8% dividend yield, among the richest in the Standard & Poor's 500.

Contrarian opportunity or trap? Only last January, shares of ConAgra topped 30. Lately, they have dipped near 22, a level not seen since 2003. And for some good reasons. Bruce Rohde, chief executive since 1997, has failed to raise profits in recent years, with earnings per share in fiscal 2005, ended in May, coming in at $1.23, 2 cents below the 2001 level. Many of ConAgra's dozens of brands -- Wesson or La Choy, not to mention Van Camp's Beanee Weenee -- are cold properties. The outlook for overall sales growth remains tepid at best. Worse, the company this year had to restate past earnings reports to increase its tax expense by a total of $105 million over three and a half years. This was the result not of some misdirected technical judgment, but what ConAgra calls "a material weakness in internal control over accounting for income taxes." This went on even as ConAgra has been negotiating a settlement with the Securities & Exchange Commission over a different set of accounting problems from back in 2001.

NOW DIRECTORS ARE LOOKING for a successor to Rohde, who asked them to do so in May. He is set to face shareholders at the Sept. 22 annual meeting. Last September, ConAgra raised its dividend for the 30th straight year, to $1.09 annually. That started me wondering: Will the streak end there? A company spokesman told me only that ConAgra's board appreciates the payout's importance and believes that ConAgra has the resources to meet it, along with such other demands as debt payments and reinvestment in the business.

What's so today, however, may not be tomorrow. To see what I mean, start by looking at ConAgra's cash flows. In fiscal 2005, the company collected revenue of $14.6 billion. From that, it counted $837 million in cash from continuing operations and spent $453 million in capital expenditures. That left $384 million, but dividend payments to common shareholders came to $550 million. How did it fill the gap? By selling assets, such as shares of poultry processor Pilgrim's Pride (PPC ). All told, asset sales raised cash of $607 million. That, plus cash from discontinued operations, cash from exercises of employee stock options, and cash on hand allowed ConAgra to also pay off $1.2 billion in long-term debt and to repurchase $181 million in stock.

How might ConAgra cope in the future? Assume it keeps its dividend at $1.09 a share. That implies a $565 million outlay, which with the $400 million it has budgeted for capital projects, comes to $965 million, or 15% more than operations produced last year. The company expects first-quarter profits to fall below last year's level, but let's assume generously that fiscal 2006 operating cash flow rises 10%, to $921 million. That still would fall $44 million short of the tab for capital spending and dividends.

Fortunately, ConAgra was able in August to sell the rest of its Pilgrim's Pride stake for $482 million. After taxes, that should leave enough for capital spending, dividends, and repayment of the $117 million in debt coming due this year. Next year, though, an additional $519 million in debt is due. ConAgra wants to liquidate $147 million in notes it holds from the 2002 divestiture of its fresh-meat operations, but when I asked, the company did not point me to other assets that might be sold for cash.

At 4.8%, ConAgra's dividend yield sticks out. Sara Lee (SLE ) (4.1%), H.J. Heinz (HNZ ) (3.3%), Kraft Foods (KFT ) (2.9%), General Mills (GIS ) (2.8%), Campbell Soup (CPB ) (2.3%), and Hormel Foods (HRL ) (1.7%) all pay noticeably less. How would Rohde's eventual successor size this up? Probably in three words: Cut the dividend. A fair argument might be made that a lower dividend already is priced into the stock. But with ConAgra trading at 16 times this year's earnings, just a bit below its better-fixed rivals, I'd rather let other investors take that bet.

By Robert Barker

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