Conagra Brands Stock: Fairly Valued Based On The Dividends (NYSE:CAG)

Conagra Manufacturers, Inc., (NYSE:CAG) along with its subsidiaries, operates as a shopper packaged items meals firm in North America. The corporate operates in 4 segments: Grocery & Snacks, Refrigerated & Frozen, Worldwide, and Foodservice.

In June 2022, we’ve publish an article about Conagra on Searching for Alpha, titled: “Conagra Might Be A Secure Haven In Occasions Of Declining Shopper Confidence”. Again then, we’ve been bullish on the inventory, as a result of historic outperformance throughout occasions of low shopper confidence. The truth is, since that point, CAG has been performing largely consistent with the broader market.

At present, we’re going to try the agency from a special perspective. The intention of this text is to worth CAG’s enterprise utilizing multistage dividend low cost fashions. These fashions are primarily discounting the anticipated future dividend funds and sum them up with a purpose to derive the truthful worth.

The first enter parameters to those fashions are the anticipated dividend progress charges and the required fee of return. Because the outcomes are very delicate to those parameters, we’re going to use three completely different situations for our analysis with a purpose to get a attainable vary of truthful values.

Assumptions for all situations

For all situations, we shall be utilizing the identical required fee of return. Basically, we choose to make use of the agency’s weighted common price of capital (WACC) for this objective. To be able to keep considerably cautious and in a means account for the macroeconomic uncertainty, we’ve determined to make use of a required fee of return from the upper finish of the vary, 7.2%

Additional, we consider that the dividend will stay protected and sustainable. As the present dividend payout ratio is under 50%, we don’t see any imminent risk of a dividend minimize or pause. Additional, in all instances we shall be utilizing 2 phases within the fashions. An early stage and a late stage, representing progress in perpetuity.

The first distinction between the completely different situations would be the assumed dividend progress fee. We are going to base these assumptions on historic dividend progress fee figures.

Excessive case

On this situation, we assume that the dividend goes to develop at a 15% fee subsequent yr, nonetheless it can step by step decline to three%, which we shall be utilizing as a perpetual progress fee.

We consider that CAG has the capability to develop their dividends at a double digit fee within the close to time period. Their enterprise is comparatively unbiased of the patron confidence, as mentioned in our earlier article, and their present dividend payout ratio can be under 50%, that means that they’ve the flexibility to extend it, in the event that they wished to.

On this situation, we get a good worth for CAG’s inventory at about $41 per share, representing an about 20% from the present worth ranges.

Mid case

On this case, our early stage progress situation shall be extra conservative. Additionally, we are going to assume a decrease perpetual progress fee.

In accordance with these calculations, the truthful worth of the inventory is about $33 per share, about consistent with the present market worth.

In our view, this case is extra practical and could also be extra consultant of actuality than our excessive case. To clarify why, allow us to check out the agency’s dividend- and dividend progress historical past.

The dividend progress fee over the previous three years has been terribly speedy. Whereas within the excessive case we additionally made the idea that it’s going to step by step lower, on this case we assume that the lower shall be extra substantial and that we’ll not see double digit dividend progress even within the close to time period.

Low case

In our worst case situation, we assume that within the subsequent years, the dividend goes to develop on the 10Y common progress, at 5.5% and afterwards it can develop in perpetuity at a fee of two%.

These outcomes are indicating a 15% draw back in comparison with the present share worth.

Whereas we count on the dividend progress to gradual, we consider that CAG will have the ability to keep a better progress fee than 5.5% within the close to time period. For that reason, we deal with this case as a low case.

Dangers to remember

Inflation continues to be operating excessive in the US and across the globe. To date CAG has demonstrated that it has pricing energy and it may possibly shift a few of its price will increase to its clients. Of their newest report, they’ve stunned analysts by posting natural gross sales progress of 8.6%, which has been primarily pushed by the robust worth/combine (+17.0%), partially offset by depressed quantity (-8.4%). The agency has additionally lifted their full yr steerage. Regardless of the constructive outcomes earlier this yr, we’ve to take into account that the macroeconomic atmosphere stays difficult. Commodity costs together with energy- and transportation costs stay comparatively unstable and these components can have materials affect on CAG’s monetary efficiency within the close to time period.

To sum up

All in all, we consider that CAG’s inventory is pretty priced on the present ranges. We additionally keep our earlier view that CAG might be a protected haven throughout occasions of low shopper confidence.

Our excessive case situation, assuming double digit income progress within the subsequent two years reveals a possible upside of about 20%, whereas our low case is indicating a possible 15% draw back.

In our opinion, the inventory might be a horny addition to a diversified dividend-/ dividend progress portfolio.

We keep our “purchase” ranking.