Tyson Foods: attractive dividend growth company (NYSE: TSN)
As a dividend growth investor, I am constantly on the lookout for additional opportunities that can supplement my income stream. The current market environment has increased volatility and created more opportunities. I add to some existing ones positions and at the same time initiate new positions in companies in sectors to which I lack exposure.
The consumer staples sector is a sector I lack exposure to at the moment. Due to the higher level of uncertainty in the markets at the moment, investors have flocked to this segment as it is more defensive. As a result, it has become difficult to find an attractively valued consumer staples company. In this article, I will analyze Tyson Foods (NYSE: TSN).
I will analyze the company using my dividend growth stock analysis methodology. I use the same method to make it easier to compare analyzed stocks. I will examine the fundamentals, valuation, growth opportunities and risks of the business. I will then try to determine if it is a good investment.
According to Seeking Alpha’s business overview, Tyson Foods operates as a worldwide food company. It operates through four segments: beef, pork, chicken and ready meals. The company processes live fed cattle and live market hogs by manufacturing dressed beef and pork carcasses into primary and sub-primary meat cuts, as well as ready-to-eat beef and pork and whole meats. cooked. It sells its products through its sales staff to food retailers, food wholesalers, meat distributors, etc.
Over the past decade, Tyson Foods has grown its revenue very steadily by 55%. This is a CAGR of around 5%, and this is done mostly organically as the company increases production, but also by optimizing its portfolio by acquiring and divesting different brands. In 2017, for example, Tyson Foods acquired AdvancePierre Foods to enhance its packaged food offering. Going forward, analyst consensus, as seen on Seeking Alpha, expects Tyson Foods to continue to grow sales at an annual rate of around 5% over the medium term.
EPS (earnings per share) grew much faster during the same decade. The 736% increase in EPS is attributed to the combination of sales growth and improved margins. Over the past decade, Tyson Foods’ operating margin has nearly tripled due to the company’s initiatives to become leaner and more efficient. Going forward, analyst consensus, as seen on Seeking Alpha, expects Tyson Foods to continue to grow EPS at an annual rate of around 3% over the medium term.
Tyson Foods has increased its dividend every year for only 9 years. However, it has not decreased the dividend payment for over 25 years. In December of this year, the dividend is expected to be increased by the board, and investors can expect another double-digit increase. At the moment, the 2% yield is extremely safe, with the payout rate only amounting to 16%.
In addition to dividends, Tyson Foods returns capital to shareholders through share buybacks. When a company is growing, buyouts support EPS growth. The graph below shows that over the past decade, Tyson Foods has repurchased stock to undo the impact of acquisitions and stock-based compensation. Over the past two quarters, buybacks have accelerated, with the company repurchasing more than $500 million in stock.
The company is trading for an attractive P/E (price to earnings) ratio. Currently, the P/E ratio when using EPS forecast for 2022 is below 10 at just 9.4. Paying 9x earnings for a growing business with a long track record of successful execution makes sense to me. The current valuation is low although it was even lower just a few months ago.
The chart below from FAST Graphs shows that although Tyson Foods’ valuation is above its lowest point in the last twelve months, it remains attractive. Over the past two decades, Tyson Foods’ average P/E ratio has been 15, and right now the company is trading at a much lower valuation. Although the growth rate over these two decades has also been higher, I still believe that the current discount makes the stock attractive.
To conclude, Tyson Foods is a company that is constantly increasing its sales and EPS. Steady growth leads to growth in dividends and buyouts that negate stock-based compensation. This dividend-paying producer is trading at a significantly lower valuation than its average valuation over the past two decades, and patient investors can take advantage.
The first opportunity is international sales. In the last quarter, international sales increased by 7%, and it was by far the fastest growing segment. Tyson Foods sells primarily in the United States and expanding its offering using its scale in international markets is a significant growth opportunity. The company is targeting markets in Asia where prosperity is increasing meat consumption.
Another medium-term growth opportunity for Tyson Foods is margin expansion. Tyson Foods is accelerating its plan to become more productive. Management is targeting $1 billion in productivity gains by the end of 2024 and now expects $400 million to be delivered by the end of 2022. This will be done using automation, l adoption of digital solutions and optimization of the supply chain.
Moreover, the company also meets the demand of the changing tastes of the American consumer. Plant-based proteins and plant-based products are becoming extremely popular, and as Tyson Foods focuses on meat, it has to adapt. She started offering her own brands of plant-based foods like pea-protein burgers. This can become an important growth lever.
Lower volumes are the biggest risk for Tyson Foods right now. The business, partly because of productivity-hampering Covid restrictions, and partly because of demand challenges, has seen its volumes stagnate. This is temporary as population growth will drive demand forward, but a surge in interest in plant-based diets may accelerate this risk.
Inflation is another big challenge for Tyson Foods. As a consumer staple company, the company aims to provide affordable protein to all customers and especially in the United States. Rising grain and labor prices will put pressure on the company’s margins and may force it to raise prices. Higher prices can hamper demand and reduce volumes that have stagnated to begin with.
The business is changing right now. The pandemic and shutdowns have been a challenge for Tyson Foods, and with picky consumer tastes it has to change and adapt. Adding vegan options and improving efficiency in the meat segments takes time, and the process itself is difficult. A successful process will unlock value, but a slower process can make investors more skeptical and drive the valuation down even further.
Tyson Foods is a solid company. The business has a proven track record of growth and is expected to continue as the company scales, adds plant-based products and optimizes its meat production. Therefore, investors can buy shares of the company for what I think is an attractive valuation, well below the average valuation.
The company faces several risks, but I believe that the opportunities are much greater. The company takes advantage of its size to grow and become more efficient. I believe Tyson Foods is a good addition to a diversified dividend growth portfolio, although I don’t think it will outperform the S&P 500 in the medium to long term.