ConAgra Brands Is A Buy For Your Dividend Growth Portfolio Shares of Conagra pull back on weak guidance despite material improvement to fundamental conditions and a big dividend increase.

ConAgra Falls Hard After Double-Digit Dividend Increase

ConAgra (NYSE: CAG) is one of our favorite Consumer Staples (NYSEARCA: XLY) stocks for a couple of reasons. To start with, the company has been working hard to reposition its portfolio over the past few years and has sustained a high level of revenue throughout the pandemic. Add to that its deep value, its high yield, and relatively strong balance sheet, and it may be the best buy in the group. Regardless, if you're looking for a value and a safe yield above 3% this stock is a great choice.

ConAgra Had A Good Fiscal Fourth Quarter

Conagra's results are a little bit mixed at first glance but when you start to dig into the details they begin to look a lot better. The net consolidated revenue of $2.74 billion is flat on a sequential basis and down 16.7% from last year but beat the consensus by 100 basis points and grew 4.5% over the past two years. The two-year comparison is very important here because last year's comparison is really hard.

Last year's fiscal fourth quarter was the peak of COVID for ConAgra brands and drove a 25% year-over-year increase in sales. The key takeaway is that COVID created a surge that has subsided but to a level above the pre-COVID level. On an organic basis, net sales fell only 10.1% but we're compounded by an extra week in last year's quarter. Taking that into account, the 2-year results are better as well.

Moving down the report, the results are equally mixed and include a contraction in the GAAP and adjusted operating margin that was less than expected. The operating margin came in at 14% and drove GAAP earnings of $0.64 or up 54% from last year and 13% better than expected. The adjusted earnings also beat the consensus but shrink 28% from last year. on a 2-year basis 4th quarter GAAP EPS is up 57% and adjusted EPS is up 23%.

ConAgra Brands Capital Position Is Greatly Improved

As mixed as the fourth-quarter results are, the real takeaway for investors is that ConAgra's full-year results are an improvement over the prior year, include double-digit increases in GAAP and adjusted earnings, and helped the company greatly improve its balance sheet. Over the past year, the company's efforts to reposition, restructure, and pay down its debt have reduced its leverage ratio to 3.6X earnings and within the company's target range. This prompted the board to not only approve a dividend increase but a 14% increase which puts the forward yield at 3.5%. Based on the balance sheet, low payout ratio, and outlook for steady if not growing revenue we view this dividend as safe with a positive outlook for future increase.

The Technical Outlook: ConAgra Falls Hard On Weak Guidance

Shares of ConAgra are down more than 4.5% in early trading and may move lower. The weaker-than-expected guidance was more than enough to offset the increase to the dividend but we think this is setting up the next buying opportunity. Shares of the stock are still above a key support level at $34 that we think will provide a bounce in share prices. Regardless, trading at these levels, this stock is trading at only 13X its earnings estimates and pays a very safe 3.5% yield. In our view, it is the best buy in the consumer staple group right now, and there are quite a few good ones.

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