RD's Picks

Everything's better with Blue Bonnet on it

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I have no idea if we're in a recession, heading for one or just bumping along. But, there is no doubt we've got a softening economy with some real problems in real estate and finance. In this environment, I believe it's prudent to have some defensive positions in a portfolio. Those would be stocks that have a safe dividend yield to put a floor under the stock price and pay you while you wait along with a business model that works no matter what the economy does. I put a few of those names in my portfolio for SLO1 and wanted to look for some others.

As those familiar with my blog entries know, I like dividend paying stocks. In an earlier blog, I wrote a little about screening for stocks that pay dividends comparable to current treasury yields, have actual earnings, and predicted earnings growth going forward. That screen (and comments from Armin) turned up a large pool of stocks for further research. I haven't completed that sifting, but did come up with a name from the consumer goods sector worth considering.

Conagra (CAG) is a packaged food company. Perhaps the definition of a business model that doesn't depend on where we are in an economic cycle. CAG produces a number of brands you probably have in your kitchen, Chef Boyardee, Orville Redenbacher's, Hebrew National, Libby's, Blue Bonnet, LaChoy, Hunt's, Wesson and others. They also produce private label brands. I think that's a key element in a soft economy, people will still need groceries, but if the budget is tight, the private label brands are likely to find a place in the shopping basket over pricier name brands.

CAG sells at a forward PE of about 13. Analysts estimate 8.2% earnings growth going forward for the next five years, not stellar but respectable if the economy continues to weaken. The dividend yield based on the 28 Jan close is 3.5%, about the same as a 10-year treasury. The payout ratio of 44% leaves some cushion and room to raise the dividend going forward. The current stock price of $21.35 is near the bottom of its 52-week range. The company has a market cap of $10 billion, $128 million of cash on hand and $3.7 billion of debt. The debt level is higher than I'd like, but with solid earnings, the CFO should be able to find some ways to reduce interest expenses as the Fed continues to slash rates.

Competitors include names like Kraft, Heinz, Campbells, General Mills and Kellogs - and all of them may be worth a closer look as well. CAG trades at a discount to most of its competition, but also has slightly lower projected growth than most of them. The dividend yield is one of the highest in the sector and would be an attractive alternative to treasuries for income investors.

Risks include higher commodity prices that could be difficult to pass along to consumers. Although, my limited grocery shopping experience would indicate food companies are passing those costs along just fine. And, if we do tip into recession, lower oil prices would also bring lower food commodity prices since crop-based biofuels essentially link grain prices to energy prices.

This isn't the kind of stock that's going to double over the course of our contest and isn't a good choice for someone who's swinging for the fences. But, it shouldn't get hammered too badly if we continue into a bear market and the dividend yield should take some of the sting out of a tough market.

I haven't added this to my sloport yet, but am watching for an opportunity to redeploy cash if any of the falling knives I tried to catch ever bounce.

Disclosure: I don't have a position in CAG.

For my friend DuffBeer, this blog entry written while enjoying a nice California Zinfandel - Chateau Souverain 2003 :)