Food shares have been hit laborious this yr—and we contrarian dividend customers can now not ignore the bargains on supply!
Investors’ overly unfavourable tackle these “essential” dividend performs makes zero sense as a result of:
- They’re partly the results of low fertilizer costs, which may’t final as a result of …
- The world wants extra meals: in accordance to the UN Food and Agricultural Organization, world meals demand will soar 70% by 2050, and …
- Food provide is tight, no thanks to droughts and Putin’s disastrous warfare (Russia and Ukraine are the world’s No. 3 and No. 10 wheat producers).
The consequence? Grocery payments drain our wallets quicker than we will fill our carts!
These circumstances are worrying, to ensure. But in addition they create alternatives for firms that course of crops, assist farmers increase their yields, and promote meals by means of shops right here within the US, the place the economic system remains to be robust.
That power, by the way in which, is regardless of the Fed elevating charges—and the price of fairly effectively all the things with them. (We’re betting Jay Powell doesn’t do his personal grocery procuring.)
Food Stocks’ Lean Start to 2023 Gives Us Our “In”
Food Stocks 2023
Food Stocks 2023
Above we see the efficiency of three shares from three totally different corners of the meals enterprise—fertilizer maker CF Industries Holdings (NYSE:), in blue; crop processor Archer Daniels Midland (NYSE:), in purple; and packaged-food maker ConAgra Foods (NYSE:), in orange.
All three are well-run firms, with rising payouts and worth positive factors to match. But not all three are equally robust buys now. Let’s rattle by means of them in reverse order, from worst to first, and see that are most ripe (sorry, I couldn’t resist!) for purchasing.
1. ConAgra Brands (CAG)
ConAgra yields 3.6% and owns household-name meals manufacturers like Slim Jim, Duncan Hines, PAM, and Hunt’s—in different phrases, inexpensive staples. This offers CAG an edge as inflation pushes customers to downgrade from pricier manufacturers.
You can see that in CAG’s income, which jumped 8.6% in its fiscal second quarter, ended November 27. And as you’ll be able to see beneath, the stock has properly tracked the payout greater within the final decade:
- CAG’s “Dividend Magnet” Does Its Job
CAG Dividend Magnet
If you’ve been studying my columns on Contrarian Outlook for some time, in regards to the “Dividend Magnet.” It’s the tendency for a corporation’s share worth to observe its dividend development. You can see this in motion with ConAgra’s payout (in purple above), which has gained 32% within the final decade, pacing its share worth (in orange) greater.
There are three issues that give us pause, although, and you may see each within the chart above.
The first is that I believe you’ll agree, 32% dividend development over a decade is fairly lame. Second, ConAgra has lower its payout prior to now: a 20% discount as a part of its spinoff of Lamb Weston Holdings (NYSE:) in 2016. (Though it must be famous that LW’s dividend greater than made up for the lower, for buyers who held on to the stock. CAG did enhance buybacks following the cut up, solely to reverse that by issuing shares later: CAG’s share depend is definitely up 14.4% within the final decade).
Third, you’ll see on the proper aspect that the corporate’s dividend development has been slowing. That’s as a result of ConAgra pays 74% of its free money movement as dividends, effectively up from 30% two years in the past and north of the 50% “safety limit” we demand. Given the constructive outlook for meals firms, I’ve little question CAG can flip that round. But within the interim, I don’t anticipate any main dividend hikes.
2. Archer Daniels Midland (ADM)
ADM operates 400 crop-procurement services and 270 processing vegetation throughout the globe, turning crops into dietary supplements and substances for meals makers. It additionally produces animal feed and runs a commodity-trading enterprise.
The stock is flashing two alerts I search for once I hunt down buys to advocate in my Hidden Yields dividend-growth advisory:
- A payout whose development is accelerating—not like what we’re seeing from ConAgra, and …
- Smartly timed share buybacks.
Let’s take these two factors without delay as a result of they’re tied collectively.
- ADM’s Dividend Drives Its Stock (With a Buyback Assist)
ADM Dividend Magnet
As you’ll be able to see above, ADM’s Dividend Magnet is working completely, and its payout hikes are literally getting greater. That alone is greater than sufficient to offset its ho-hum 2.2% yield. Meanwhile, the corporate’s buybacks (in blue) scale back its share depend, boosting earnings per share, which, in flip, lifts the share worth.
So why is ADM within the second spot? It comes again to the Dividend Magnet. As you’ll be able to see above, the payout has gotten forward of ADM’s share-price positive factors (although not by a lot). We desire a worth that tracks, and even trails, payout development as a result of a Dividend Magnet also can work in reverse—dragging down a share worth that’s gotten forward of the dividend.
3. CF Industries (CF)
Sitting in high spot is CF, a US fertilizer producer that dominates its market. CF sees fertilizer demand rising as early as this spring, as farmers look to increase their yields to benefit from still-high crop costs. And that’s earlier than we take a look at the necessity to replenish depleted world wheat shares (no thanks to Putin).
Meantime, CF is likely one of the most cost-effective shares on the market, with a price-to-earnings (P/E) ratio of 5. Single-digit P/Es are unprecedented lately, particularly for firms with CF’s development potential.
And then there’s the large quantity of capital CF is handing shareholders. Its dividend just lately “Rip Van Winkle.” After being parked at $0.30 per share quarterly since 2015, administration popped it to $0.40—a 33% enhance!
It’s additionally directing extra cash into share buybacks. Over the previous yr, the corporate has repurchased almost 10% of its shares. And in November 2022, administration authorized one other $3-billion buyback program that may lower the excellent share depend by an additional 18%.
Put all of it collectively and also you’ve received a dividend simply beginning its ascent, together with a share worth that’s solely simply begun to reply. That’s the other of the state of affairs we’ve with ADM, and the hole beneath is a key driver of our upside:
- CF: Another Dividend Magnet Star within the Making
CF Dividend Magnet
Throw within the well timed buyback program (which feeds our dividend development, as fewer shares excellent leaves the corporate with fewer on which to pay out), and also you get a hearty achieve (and dividend) play that’s simply beginning to sprout.
Disclosure: Brett Owens and Michael Foster are contrarian earnings buyers who search for undervalued shares/funds throughout the U.S. markets. Click right here to find out how to revenue from their methods within the newest report, “7 Great Dividend Growth Stocks for a Secure Retirement.”