Conagra Brands, Inc. (NYSE:CAG) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 30th of January will not receive this dividend, which will be paid on the 3rd of March.
Conagra Brands’s next dividend payment will be US$0.21 per share, on the back of last year when the company paid a total of US$0.85 to shareholders. Calculating the last year’s worth of payments shows that Conagra Brands has a trailing yield of 2.6% on the current share price of $32.28. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Conagra Brands paid out 51% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 45% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s positive to see that Conagra Brands’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see Conagra Brands earnings per share are up 2.7% per annum over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company’s prospects for future growth.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Conagra Brands has lifted its dividend by approximately 1.1% a year on average.
The Bottom Line
Has Conagra Brands got what it takes to maintain its dividend payments? While earnings per share growth has been modest, Conagra Brands’s dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Conagra Brands’s dividend merits.
Wondering what the future holds for Conagra Brands? See what the 14 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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