Activist Intervention Makes This Packaged Food Stock Intriguing

ConAgra-Foods-LogoConAgra Foods (NYSE: CAG), the maker of such food items as Slim Jim, Swiss Miss and Orville Redenbacher’s, is in the crosshairs of activist hedge fund Jana Partners.
Jana has taken a 7.2% stake in the packaged food stock, citing underperformance as the biggest reason. But it isn’t just any underperformance: Jana notes that since the 2013 buyout of Ralcorp, the company has done a very poor job of execution.
Even still, compared to other major processed food companies, ConAgra hasn’t been doing all that bad. Since ConAgra completed the Ralcorp acquisition in early 2013, shares are up 36%, just under the 39% return for the S&P 500. But that’s still above the returns of companies like Kellogg (NYSE: K), General Mills (NYSE: GIS), J.M. Smucker (NYSE: SJM) and Campbell Soup Co. (NYSE: CPB).
That doesn’t mean there aren’t improvements to be made for the largest private food company in the U.S. ConAgra’s operating margins have remained stagnant in the single digits over the last couple years, while many competitors enjoyed double-digit margins.
The company has missed earnings a number of times since the Ralcorp acquisition, while also making numerous downward revisions to long-term guidance. Note that ConAgra took a $1.3 billion impairment charge on the Ralcorp acquisition earlier this year.
ConAgra is a decent, even underrated, income play. It offers a 2.6% dividend yield and has paid a dividend for 29 years. It’s also paying out just under 50% of its earnings via dividends.
However, another gripe by Jana Partners is that there hasn’t been any dividend growth since the Ralcorp acquisition. The company’s quarterly dividend payment has been 25 cents a share since October 2012.
Yet the core of Jana Partners’ plan is a strategic review of ConAgra’s strategy and corporate structure. Basically, this means it will be looking at the company’s various brands and will push the company to sell off those that are underperforming.
This could mean shedding its private label food business that it just bought a couple years ago. Other businesses that could be up for sale include its frozen food business.
Also, recall that Jana Partners is currently battling Qualcomm (NASDAQ: QCOM). It’s pushing the semiconductor company to accelerate its share buyback plan and to consider a split of its licensing and hardware businesses.
Now, dividends or buybacks aren’t the focus of the ConAgra story – at least not yet. Right now it’s about unlocking value by way of realigning its food brand portfolio. But by shedding these underperforming assets, ConAgra could get back on the path to dividend raises and buybacks.
ConAgra has been receptive to Jana Partners thus far, noting that it’s looking forward to discussions after it releases quarterly results at the end of this month. It also agreed to Jana’s request to push back the deadline for shareholder nominated directors from June 21 to July 8.
There’s plenty of opportunity to improve shareholder returns with a renewed commitment to dividend growth and share buybacks. In the year prior to the Ralcorp purchase, ConAgra was buying back over 5% of its shares outstanding. Since then, buybacks have been nonexistent.
Back in April I featured ConAgra as one of the companies Warren Buffett should have bought instead of Kraft Foods Group (NASDAQ: KRFT). One of the key drivers was the dividend yield, which is still one of the best in the food industry.
ConAgra has noted that it plans on upping its dividend and putting a buyback plan in place for fiscal year 2016. Jana Partners will be the force that ensures ConAgra holds up its promise to shareholders.

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