Campbell Soup: For Dividend Investors, Better Choices Are Available

Summary: Campbell Soup (CPB) is rated here as a decent, but not outstanding, dividend growth company. It is worthwhile candidate to consider for investors who are pursuing a long-term dividend strategy, but there seem to be other, better choices available.

Type of Company and Stock: In Morningstar’s Style Box, Campbell is classified as a large value company. Its business is centered around soup, beverage, confectionery, and prepared food products sold both to consumers and the commercial food market. Its Web site may be accessed here.

Company Story and Strategy: Campbell is the world’s largest seller of soups. It is also a leading producer of juices, sauces, cookies, crackers, and other baked goods. Its soups are sold under the Campbell brand globally. Other well-known brands include Pepperidge Farm, V8, Pace, Prego, Swanson, and Arnott’s.

The company is organized into four divisions:

U.S. Soup, Sauces and Beverages includes Campbell's brand condensed and ready-to-serve soups, canned pasta, gravies, beans, and tomato juice; Swanson broth and canned poultry products; Prego pasta sauce; Pace Mexican sauce; V8 vegetable, Splash, and V-Fusion juices; and Wolfgang Puck soups, stocks and broths.

Baking and Snacking includes Pepperidge Farm cookies, crackers, breads and frozen products in U.S. retail; and Arnott's biscuits and salty snacks in Australia and Asia Pacific.

International Soup, Sauces and Beverages includes the soup, sauce and beverage businesses outside of the United States, including Europe, Mexico, Latin America, the Asia Pacific region, as well as the emerging markets of Russia and China, plus the retail business in Canada.

North America Foodservice includes the “away-from-home business” in the U.S. and Canada.

Campbell derives about 78% of its revenue from North America and 22% from sales in 120 countries. Each of CPB’s North American brands is #1 or #2 in its category or segment.

Financials: (Sources: Campbell and Morningstar) Campbell has good, but not spectacular, financials. Its EPS growth rate over the past 3 years has been an excellent 21%. This suggests good cost control and productivity improvements, as its revenues grew at just a 2% clip over the same time period, hurt by currency exchange rates and the strength of the dollar. CPB’s most recent 12-month EPS growth rate was even better than the 3-year average, at 42%.

In its May 21 report on calendar Q1 (its fiscal Q3), the company headlined that its “adjusted net earnings per share” increased 12%, and that it was raising its 2009 guidance. Looking behind the headlines, the company stated that it expects to deliver sales growth within its long-term target range of between 3 and 4%. It is ramping up its marketing spending as well as its investment spending in Russia and China. On a currency-neutral basis, Campbell expects EPS growth to exceed the previously announced 5% to 7% range. The consensus of analysts covering the stock is for a future 3-5 year earnings growth rate of 7%.

Campbell has an off-the charts ROE of 90%, but that is misleading, as it is fueled by a 120% debt-to-equity (D/E) ratio. I much prefer companies with capital structures that employ lower D/E ratios. The S&P 500’s average is about 100%. That said, many companies make a high-debt capital structure work, and Campbell appears to be one of them.

Dividends: Campbell has been paying dividends since 1980, but it does not have a decades-long record of increasing them. After three years of holding its dividend steady (2002-2004), the company has increased its dividend each year since. CPB pays dividends four times per year and typically increases the payout with the third payment each year (usually declared in September, so not yet declared for 2009). The dividend growth rate for the past 3 years has averaged 9% annually.

CPB’s current yield is 3.5%, compared to 2.8% for the S&P 500 as a whole. Starting with an initial yield of 3.5%, if the 9% rate of dividend growth were to continue, the dividend return (on initial cost) would double in about 8 years. Under the Ten-by-Ten approach to dividend investing, Campbell would be returning 10 percent on initial cost in dividends alone in its 12^th year after purchase. Re-investing the dividends would accelerate that schedule.

That said, the confidence level in Campbell’s increasing its dividends as just described must be considered just fair. The 2008 dividend raised the dividend payout ratio to just over 50%. The last time that happened, a few years ago, the company lowered and then froze its payout for 3 years, allowing the payout ratio to gradually decline to less than 40%. Also, a continuing dividend payout increase of 9% per year would exceed the company’s expected rate of earnings growth (compared to both its own guidance and analysts’ expectations), again throwing into question CPB’s ability to continue to increase its dividend at a 9% rate. It would seem that a sustainable increase rate of 4% to 6% is more likely.

Stock Performance and Valuation: Campbell’s stock has outpaced the market in total returns for the trailing 1-, 3-, 5-, and 10-year periods. It is down about 3% so far in 2009, a little under the S&P 500’s return for the year.

The stock’s valuation ratios all clock in at a little better than the stock’s own historical 5-year averages. When compared to the historical S&P 500 benchmarks that I use, CPB’s valuation ratios are mixed (some better, some worse). I rate the stock’s valuation as “Fair” at its recent price of $28.89.

Investment Thesis and Conclusion: On the demanding company scoring system that I use for dividend-paying companies, called Easy-Rate™, Campbell garners 34 (of a possible 74) points, which grades out as “Good.” This, combined with its “Fair” valuation, makes it a stock worth considering for dividend investors. However, lacking a more compelling valuation and given the question about the sustainability of its recent 9% annual dividend growth rate, I suspect most dividend investors can find better candidates.

Disclosure: Campbell is not among my current holdings.

Comments

[TCK:]

So what are the better choices ?

Jun 12 08:30 AM

[HerrKevin:]

As TCK points out, it would be more interesting to know what you think the better options are. Anybody can read about CPB's business segments and earnings in their quarterly reports, what is more interesting is who you think is more worthwhile for the dividend. Perhaps Kraft?

Jun 12 09:10 AM

[David Van K...:]

Thanks for your comments. Hey guys, writing these articles is time-consuming! I began this article thinking that CPB would be one of the best. The lukewarm result surprised me a little. Having done the work, I thought I would share it. CPB may well be attractive to some dividend investors looking to round out a portfolio. For others, down-ranking or even eliminating stocks as investment candidates is as important as than finding the right ones. At the moment, other food-service stocks that look attractive as dividend investments include Coca-Cola, Heinz, McDonald's, McKormick (which I analyzed here: seekingalpha.com/artic... ), and Pepsico (analyzed here almost a year ago: seekingalpha.com/artic... ). Stay with me, I do these in-depth single-stock analyses when I get the chance.

Jun 12 10:06 AM

[Dotcom:]

Appreciate your reply to comments e.g. KO & MCD as I own KO.

Jun 12 01:40 PM

[Graham and ...:]

Campbell Soup has a decent, though not superlative yield, but one that isn't growing all that fast. As such, it fails (by about two years), the "10-by-10" test cited by the author.

Jun 12 04:11 PM

[Graham and ...:]

Dear Dotcom:

What I know about KO; 4% yield, 8% annual growth; 10% yield on your original cost after 12 years. That's just outside my parameters.

If you "up" either the yield or the growth rate, I'm a buyer.


On Jun 12 01:40 PM Dotcom wrote:

> Appreciate your reply to comments e.g. KO & MCD as I own KO.

Jun 12 04:18 PM