Attractive income shares don’t exist just on the UK stock market. Rather, across the pond in the S&P 500, there are countless examples of stocks with high yields. Of course, this doesn’t mean that all are worth buying. However, when I spotted one with a dividend yield of 9.8%, I decided it was time to dig deeper!
A consumer staples giant
I’m talking about Conagra Brands (NYSE:CAG). Even if you haven’t heard of the parent company, you’ll probably know some of the brands it owns. It’s the maker of Birds Eye vegetables, Healthy Choice meals, and other food products. Over the past year, the share price has fallen by 40%, pushing the dividend yield to 9.8%.
Let’s address the stock fall first. The biggest issue has been inflation. Meat, packaging, freight, and commodity costs have surged, negatively impacting profitability. Last month, a quarterly update showed it expects cost inflation of a whopping 7% this year alone. This is being driven partly by tariffs and rising protein prices.
At the same time, shoppers are becoming more price-sensitive. Many consumers are trading down to cheaper private-label alternatives instead of buying branded frozen meals and snacks. Reported net sales for the fiscal Q3 decreased by 1.9% versus the same period last year.
Dividend appeal
Despite those worries, the dividend yield does look attractive. Near 10%, it’s extraordinarily high for a consumer staples company. More importantly, the company has paid dividends continuously since the 1970s.
Yet when assessing if the payout is sustainable, it’s a tough question to clearly answer. Even after recent earnings pressure, Conagra continues to generate substantial cash flow. For example, in the latest quarter, it generated $896m in net cash flow. Management has recently refinanced debt and reiterated its commitment to shareholder returns, such as via dividends.
There are also signs that parts of the business may be stabilising. CEO Sean Connelly said in the latest update that he was seeing “continued upward inflection in our Frozen and Snacks businesses”. These two areas recently returned to modest organic growth. If inflation moderates and pricing pressure eases, earnings could recover faster than investors expect. This, in turn, would support the dividend.
Overarching concerns
Even with the potential green shoots emerging, debt remains elevated following years of acquisitions. At $7.3bn, it’s still considerable! Further, Walmart accounts for nearly 30% of sales, creating major customer concentration risk. And if inflation stays stubbornly high with added pressure from the recent energy price shock, profit margins could be squeezed even more.
On that basis, I think there are better dividend shares that offer a more appealing risk-to-reward ratio. I believe this holds true both for US stocks and UK alternatives. However, investors with a higher risk tolerance than me might want to consider it.
