Investors looking for a consumer staples company to add to a high-yield dividend portfolio would do well to consider Conagra (CAG 0.40%). The first reason some investors may notice is its attractive 4.7% dividend yield. The average consumer staples stock, using Vanguard Consumer Staples ETF as a proxy, has a yield of just 2.6%. But there's another feature to like about Conagra: improving operating results. Let's dig in.
Conagra did what everyone had to do
The coronavirus pandemic left behind all sorts of dislocations in the world, and one very important lingering impact has been inflation. For a food maker like Conagra, that meant higher prices for ingredients, rising employee costs, and increasing shipping rates. It clearly wasn't alone in facing this challenge, nor was it alone in the way it addressed the headwind. Conagra increased consumer prices just like all of its peers.
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Yes, it worked to cut costs as well. But the most impactful effort was higher prices. The problem with this approach is that the customers invariably suffer from sticker shock when prices go up. That was particularly problematic during the price hikes this time because inflation was so severe. The predictable response is that customers pull back on buying. So sales go up because of higher prices, but volume goes down.
The expectation is that once customers grow accustomed to the new pricing, they will return to their prior buying habits. That shows up as volume growth. The numbers so far haven't been that great for Conagra. For example, in the second quarter of fiscal 2024, ended Nov. 26, 2023, volume was down 3.3% in its frozen foods business and 3.7% in grocery and snacking, leading to an overall drop of 3.5%.
The trend is Conagra's friend
The thing is, volumes don't recover overnight. It is a process. And when you step back and look at the company's volume performance over a longer time period, the story looks a lot better. On the frozen food front, the company's volume was down 11.5% in the fourth quarter of fiscal 2023. That improved to a 10.5% drop in the first quarter of 2024. And then Conagra did select marketing, testing to see whether or not customers were receptive to returning to prior buying habits.
Those tests led to the volume decline coming in at just 3.3% in the fiscal second quarter. While that isn't great, it is the improving trend that investors need to focus on because it suggests that Conagra's business is getting stronger. The trend in the grocery and snack business has also been improving. The nadir was in the third quarter of fiscal 2023, when volume was down by 10%. Volume declines have gotten smaller each quarter since and are now down 3.7%.
The improvements at the company's main divisions have obviously rolled up to a similar improvement trend at the company level. Volume was down 9.9% in the third quarter and has improved each quarter since that point to the most recent drop of 3.5%.
Conagra is still a work in progress, but it is definitely heading in the right direction. And when you add in the marketing success in the frozen food space, which it will obviously try to replicate in other areas, there's a very real chance that it could get back to volume growth shortly.
Volume and price interact
Conagra's volume story is the good news. The bad news is that the consumer staples company is starting to lap the price increases it made. That's going to put pressure on sales, but this is normal. The key is that a return to volume growth is expected to offset that potential headwind. It looks like Conagra is working toward just that outcome. And if it achieves the feat, Wall Street may take a more positive view of the shares.
In other words, if you are looking for a high-yield food stock, you might want to act on this one.
