Key Points
Conagra has a multi-decade record of paying dividends and currently offers a high yield.
Weak consumer spending trends have pressured sales and profitability lately.
Management expects improvement, but this dividend stock carries above-average risk.
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Conagra Brands (NYSE: CAG) has paid a dividend every year since 1976 and currently offers a tasty yield of 7.3%. That high yield doesn't come free, as the company faces challenges driving sales growth and weak profitability.
With the stock trading at around $19 at the time of writing -- down 24% over the past year -- can investors expect the dividend to be sustained and the stock to recover to $25 in the next year or so? I think so, but management's efforts to stabilize sales and profitability will need to show results.
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Sales are down, but brands are gaining market share
Conagra owns many top brands like Slim Jim, Orville Redenbacher's, and Marie Callender's. But higher grocery prices have been a significant headwind for some food stocks over the past few years. The company is currently trying to return to sales growth after a weak stretch. Its organic (non-GAAP) sales fell 3% year over year in the last quarter.
There are good reasons to expect improvement. Conagra's frozen and snack brands, which generate about 70% of the company's sales, are holding or gaining market share. The company's brands remain relevant, and it also validates management's strategy of investing in food options with more protein and fiber, which is resonating with shoppers.
These share gains could signal a return to sales growth coming soon. But it's also essential for Conagra to show improved margins to maintain the $0.35 quarterly dividend, since investors are likely interested in the stock for the dividend.
Can the stock hit $25?
The company's profits have been declining and are expected to decrease again this year. However, part of this weakness stemmed from a strategic decision: A year ago, management decided to invest in driving higher sales volume at affordable price points rather than chasing near-term profit.
The good news is that management expects profits to improve. It aims to reduce costs, which could be achieved through the use of artificial intelligence (AI) that management is exploring now. These efforts could support higher margins in the coming years.
The most important profit metric to watch is free cash flow. Analysts expect it to drop to $758 million in fiscal 2026 (which ends in May) before improving to over $1 billion by fiscal 2028. This matters because the company paid out $669 million in dividends over the past year, so the dividend is covered.
The stock could rebound to $25 as sales stabilize and cost savings materialize. For fiscal 2026, management's current guidance calls for adjusted sales to be +/- 1% over fiscal 2025.
But investors shouldn't be too patient here. If the company fails to meet its sales guidance and doesn't show improving margins and free cash flow, I would consider selling.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
