The Bad News for This 4.7% High-Yield Food Giant

Conagra Brands (CAG), the high-yield food giant, has been a darling of income investors for years, thanks to its attractive 4.7% dividend yield. However, recent developments suggest that the company may face challenges in maintaining its payout and financial health. This article explores the bad news for this high-yield food giant and its implications for investors.

Conagra's debt load has been a growing concern for investors. The company's debt-to-EBITDA ratio has climbed to 6.2, near its highest point in the past five years. This high leverage, coupled with a modest interest coverage ratio of 2.7, raises concerns about the company's ability to maneuver during difficult periods and its vulnerability to rising interest rates.

Conagra's focus on putting out fires during the pandemic may have delayed efforts to address its balance sheet. While the company has signaled plans to reduce leverage, investors should monitor its progress and ensure that management follows through on its commitment to deleveraging.
The company's high payout ratio, currently around 68%, indicates that a significant portion of its profits is used to cover dividends. While this is within the acceptable range for income-seeking investors, it raises concerns about the sustainability of the dividend, especially if earnings growth slows or the company faces unexpected expenses.

Conagra's free cash flow (FCF) and earnings growth have been volatile in recent years. In fiscal 2020, FCF was negative due to the COVID-19 pandemic, but it rebounded to $650 million in fiscal 2021. Earnings per share (EPS) grew by 11% in fiscal 2021 but declined by 14% in fiscal 2022. The outlook for future growth is positive, with analysts expecting EPS growth of 7% in fiscal 2023 and 9% in fiscal 2024.
In conclusion, while Conagra Brands offers an attractive dividend yield, investors should be aware of the challenges the company faces, such as high leverage and a high payout ratio. It is essential to monitor the company's progress in reducing leverage and maintaining earnings growth to ensure the sustainability of its dividend. As always, investors should conduct thorough research and consider their risk tolerance before making investment decisions.
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