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Packaged Food – Dividend Stocks

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Dividend stocks food sector analysis

dividend stocks food sector

We suffered a 10% market correction in February.  The major stock indices have recaptured some of that loss, but certain sectors have really been left behind recently.

Real estate investment trusts (REIT’s) and utilities come to mind immediately.  The threat of rising interest rates along with limited benefits from the corporate tax reduction has left many of those share prices at or near 52-week lows.

Another sector that has struggled includes big food dividend-paying companies.  Let’s take a look at why and what their recent dividend trends look like.

WHY IS THAT ON THE MENU?

Big food dividend companies have long been fertile shopping ground for the dividend stock investor.  Plump dividend yields, juicy dividend growth, and relatively recession resistant businesses make them good grub for the hungry dividend shopper.

I DON’T WANT THAT FOR DINNER

But, big food has been struggling because of changing consumer preferences.  We no longer want our food in a box or can.  We want fresher, healthier fare.  Additionally, life is fast-paced and many folks just want to snack multiple times a day rather than sit down for a traditional meal.  Most noteworthy, big food has been slow to adapt to these changing consumer preferences.

WHAT DOES IT MEAN?

Revenue trends are flat at best and in many cases down on a year over year comparisons.  Sales volume declines have pressured revenue.  Price concessions to encourage consumption have further limited the top line.  In turn, declining revenue and lower prices mean downward pressure on profit margins, earnings growth, and stock prices.

WHAT IS THEIR RESPONSE?

These companies know it’s time to adapt or shrink.  Their actions fall in three major areas.

INDUSTRY CONSOLIDATION

Kraft Heinz is the poster child here.  The private investment firm 3G Capital merged the two iconic brand name companies in 2015.  3G is known for running lean and they promptly stripped out $1.7 billion in annual spending from the combined entities.

ACQUIRE FAST GROWTH NICHE BRANDS

Big food has been gobbling up smaller niche brands.  The idea is to use their marketing clout and distribution channels to grow these brands rapidly.

  • Campbell’s Soup recently announced the $6.1 billion acquisition of snack company Synder’s Lance.
  • General Mills announced it will pay $8 billion for Blue Buffalo, the owner of the top natural pet-food brand in the US.  All I can say is thank goodness Fido is eating all natural food products.  He deserves the best.  Gone are the cans of dog food slop we fed our poor pooch back in the day.  Relax dog lovers.  Just a little humor to keep it light.  Fido needs healthy food too!

PRODUCT INNOVATION

Big food is trying to develop and market new snacks and good for you products.  This is easier said than done.  Having worked in the food industry for about 15 years, these companies are big, bureaucratic and have trouble getting out of their own way when it comes to innovation, research, and development.

DIVIDEND STOCKS FOOD SECTOR CHART

Here is a brief overview of some of the major players in the sector from a dividend stock investor perspective.

One thing that popped out to me is the slowing dividend growth rate.  In each case, the 2017 percent dividend increase is lower than the 5-year compound annual dividend growth.  It is clear to me that the changing consumer and the slow response by these companies are hindering dividend growth.

Even worse, General Mills indicated it will freeze its dividend for the next couple of years partly to finance the acquisition of Blue Buffalo.  It’s not enough that Fido gets all natural food products, but now that lovable canine is costing me dividend growth.

DIVIDEND STOCKS FOOD SECTOR WRAP UP

  • What do think about this sector from an investment perspective?
  • Do you own any of these stocks?
  • Are you already an owner and interested in adding additional funds?

Leave a comment and let us all know.

If you liked this stock sector analysis, check out some others:

Also, look for a dividend deep dive on some of these individual companies coming in future posts.

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Comments

  1. Oh man… Time for breakfast!!!

    Not surprising that some of the traditional processed food giants are struggling. I live in the town of General Mills’s HQ and I know they’re struggling mightily to figure out all the latest food trends. From whole foods to gluten free, and low carb paleo diets, there’s less room in that cart for Chef Boyardee….

    Reply

    • That’s for sure Cubert. But, I don’t mind a can of good ole can of Progresso soup from time to time. Eat healthy my friend. You need good fuel for the hiking trails. Tom

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    • Good point Mr. DS. Patience will likely be a key to investing in this group. Of course, they do pay nice dividends while we wait. Tom

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  4. I’m sad to hear the news about GIS as an investor. They carry some great brands and have a good customer base. Hopefully they can continue to evolve. In the meantime I’ll still enjoy my favorite Honey Nut Cheerios!

    Reply

    • There you go SMM. That’s looking on the bright side of things. I am bummed about the dividend freeze too. Tom

      Reply

  5. Fido is suffering from similar diseases and disorders as his master. Thanks to all the process food he has been eating.

    The so called “natural food” as marketed by some of the big food makers has been found to be anything but natural. There is on-going litigation over “Natural” food labels. I feel process food could end up being treated the same way as tobacco i.e. warning labels required.

    I think the headwinds are to continue for such companies as consumers are getting smarter and more aware of what they are putting in their bodies and long-term health effects.

    Reply

    • That’s a view that I’m not really educated enough to debate Mr. ATM. I do think their will be more consolidation in the industry. Tom

      Reply

  6. Hmm KHC also looks nice. Whats up with that company? Good yield ~4%, Good equity ratio ~50%. NetDebt/EBITDA tough little bit high 3,6, Normalized P/E ~18 if we use 5bUSD Net Income. Maybe I should add KHS along with GIS. I will have some freed up capital in short time soon as I have sold some of my Baltic holdings due to their cut dividends.

    Reply

    • Hey p2035, KHC had a nice run leading up to and shortly after the merger as they stripped out costs and increased the dividend. Since then, rightly or wrongly, they have been cast in the same negative light as their competitors putting pressure on the stock price. Tom

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      • Just bought GIS and KHS. My buy on KHS is based on my refrigerator as it has one of its Ketchup. No one makes ketchup like Heinz 🙂

        Reply

        • Congrats on the purchases p2035. I hope they work out well for you. Now for the important stuff, can I get some fries to go with that ketchup? Tom

          Reply

  7. Great analysis Tom. I’ve been watching HRL and KHC for quite some time, as I am still a bit light in that sector. I think those two companies have the best management and best long-term prospects for pivoting based on changing consumer tastes.

    If I decide to move out of my Kroger position, these companies are candidates for that capital. I think both are well-priced right now.

    Thanks as always for your insights.

    Reply

    • Hi FIREman, I initiated a position in HRL a few weeks back and have a dividend deep dive coming up on it next week. Maybe that will help with your thought process. Tom

      Reply

  8. Hi Tom,

    Great analysis! Like you said, we gotta’ eat!

    One would think this industry is pretty solid, but with changing consumer patterns in recent years, the fact that wellness is trendy even for Fido, and our obsession with fresher and greener foods, big food players are bound to take a hit if they don’t apply themselves. Hopefully they don’t mess up the products from the niche companies they acquire when seeking to innovate.

    From a capital-appreciation perspective, I would think it makes sense to invest in some small niche food companies that are doing good and you believe in -assuming they’re publicly traded- in hopes that they would be bought by a larger one eventually, and one can make a nice profit!? Or buy the big one when it’s low and just leave it alone for a few years? Food for thought here. 🙂

    Reply

    • I think you have two pretty good approaches to playing this sector Lily. I wish I could pick the next niche brand to be bought out at a big premium, but I’m not that good. I will stick with the big ones, be patient and see how it goes. The big companies have been buying niche brands for a while now, but you never really hear much about how they are doing. Are they screwing them up? Or are they just too small to make a difference? Or some combination of both? Not sure, but very interesting. Tom

      Reply

  9. Good article Tom. I was acquiring both HRL and GIS back last year. Since GIS has decided to freeze the dividend I have decided to suspend my purchases for now. If HRL continues below my cost basis I would consider adding to that position. I think all of these companies will do fine over the long term but it will take them time to catch up with the trends. Thanks for sharing.

    Reply

    • Interesting MD. We have the same strategy/thought process on future additions to HRL and GIS. Thanks for capturing it here.Tom

      Reply

  10. The slowing growth rate is a concern. I have GIS and HRL in my portfolio, so hopefully the growth rate will pick up steam. Hopefully, these companies will be able to adapt to a changing and ever more competitive environment.

    Reply

    • Hi DP, The dividend freeze at GIS really bothers me as it relates to dividend growth. I always feel that once a dividend is frozen, management is one step closer to reducing it if things do not go well in the business or they choose to allocated capital elsewhere like more acquisitions. Tom

      Reply

  11. I own both GIS and HRL. I think that the consumer has ben getting more and more educated and aware n recent years. Although there is still debate on what exactly natural is (as Mr. ATM points out) I think its a good sign that also the large food companies are starting to recognise the trend, albeit slowly.

    Hopefully this will continue and we will all be healthier for it.

    Reply

    • Hi Mr. Robot. The better nutrition movement has been going on a long time in my opinion. I have a hard time understanding why over the last few years it seems to have come to the forefront for some of these companies. For example, Pepsi’s snack business had done very well over recent years. I don’t think those snacks are healthy. In fact I think it’s junk food. So snacking on unhealthy food from Pepsi all day is okay, but having a meal of unhealthy food from General Mills is not. Just can’t get my arms around exactly what the consumer is thinking. I suspect these companies will adapt over time. After all, we gotta eat. Tom

      Reply

  12. Like your title says … “Gotta eat”. Looks like sound investment strategies. I have considered buying Vanguard Consumer Staples ETF (VDC) … it has by far the best yield among all sector funds …2.66%. Buying consumer staples stocks is always a good idea.

    Reply

  13. Hey Tom

    Nice post, dam that sucks about general mills. I didn’t even know that. Its one of those stocks I dont think you need to worry about long term though. Just continue dripping it, I wont be adding to my position at the moment though. Consumer defensive is one of my highest sectors in the portfolio. As you mentioned we need to eat!

    Set it and forget it
    Cheers

    Reply

    • Hi Rob,
      I found out about GIS freezing the dividend from Time in the Market blog. It was in their press release when they announced the acquisition. They didn’t exactly say it was frozen but they implied it. Actually said they would “maintain the current level” over the next couple years in order to reduce leverage. I’m not too heavy in staples, that’s why I’d like to add to KMB. Tom

      Reply

  14. I didn’t know that General Mills was freezing their dividend to pay for the dog food brand. I don’t have any of these individual stocks. I love Campbell’s soup as a consumer but try not to have them very often as they are ‘not healthy’.

    Reply

    • Thanks for your thoughts on the market Troy. You have been pretty consistent with your opinion on market direction dating back to last year when you expected a small correction early in 2018. Tom

      Reply

  16. I don’t know if I’m too eager to invest in the food companies these days. Some of them are a bit too desperate for growth and it shows with some of these expensive acquisitions. The problem for food stocks are multiple. One, customer tastes are changing and while certain companies are certainly flexing to move to those changes, it costs money and splits their product lines making them less efficient. Two, in order to search for growth some of these companies are consolidating and/or cost cutting and that leads to an inferior product. Three, competition is intense especially given the price wars in grocery stores putting pressures on food producers. Lastly, there’s a ton of options out there these days. I can’t remember the last time I bought brand name anytime for myself and while my g/f still gets a few products she likes(Honey Smacks cereal), most of our foot purchases are at stores like trader joe’s.

    Reply

  17. Hey Tom! Now, that is my type of pizza.

    I don’t have any food sectors in my individual stock selection. I was a hair close to pulling the trigger on GM back when I was doing stock picking, but there was always something else I had my eye on.

    As a matter of fact, the only food-related stock I have is MCD, which has served me well. It has nearly doubled in the last few years. The all-day breakfast really helped in that regard!

    Reply

    • Agree on MCD HP. It has been a good one for me too. And, I get hungry every time I look at that pizza picture. Tom

      Reply

  18. DD –

    Tough, tough. Strangely – Kraft has been beaten up lately, but they seem to not have been able to “right” the ship since the merger. SJM is a wonderful Ohio company (Biased!!) and just picked up Rachel Ray’s products. Out of everyone – Hormel has the streak and I like SJM. Those are my 2 cents!

    -Lanny

    Reply

    • Hey Lanny, I just saw where SJM acquired Ainsworth Pet Nutrition. Seems the market liked that deal better than GIS’s pet food deal for a variety of reasons (price and synergy opportunities). Thanks for the thoughts. Tom

      Reply

  19. Hi Tom,

    General Mills looks like it’s been hit pretty hard this year, Seems fairly cheap from a P/E perspective, back in the mid teens where it was a few years ago, and reasonable yield and earnings growth. Might be one I have a closer look at…

    Cheers, Gary

    Reply

    • Good luck Gary. I have a smallish position in GIS (used to be larger) and think I will just sit tight, hold, collect the dividend and see what happens. I’m not a fan of the dividend freeze. Tom

      Reply

  20. David Fish’s definition is “Once the overdue situation reached the point of a company paying the same total dividends in back-to-back years, it was considered a “freeze,” requiring deletion from the CCC listing.”

    Since GIS dividends were $1.94 in 2017 and should be $1.96 in 2018 they would technically be frozen in 3Q 2019. Assuming they are hitting their deleveraging targets, I would expect a small increase (like CVX a few years ago) to keep the streak intact. (Still lousy growth though unless you believe in the acquisition synergies).

    Reply

    • That makes sense SR. GIS’s language regarding the dividend was pretty vague too. Mr. Fish does some good work. I love the huge spreadsheet he keeps with all the dividend streaks by company. It’s a great resource. Tom

      Reply

  21. Have you ever heard those people say I was working so hard I forgot to eat lunch? Yea, I’m NOT one of those people. I’m sad to hear about GIS, but hopefully the BB deal with be worth it in the long run.

    Reply

    • Hey MH, I’m a lunch guy too. Being only 160 pounds, I can’t afford to miss a meal. Let’s hope you are right about GIS and the acquisition will be part of a turnaround and growth story. Tom

      Reply

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