Campbell Soup Company: High-Yield and Speculative Capital Gain Potential-Part 4

Introduction

This is the fourth of what will be a long-running series highlighting dividend growth stocks that have technically entered bear market territory.  Many investors define a bear market as when prices fall at least 20%.  After coming out of the true bear market inspired by the Great Recession, stocks have generally been enjoying a very strong and long-lasting bull market.  Additionally, as interest rates have been in a steady freefall, high-quality dividend growth stocks have become investor favorites.  Consequently, high-quality dividend growth stocks have for the most part become overvalued as a result.

However, this has selectively been changing as several high-quality dividend growth stocks have technically dropped in value by 20% or more over the last year or two.  In previous articles in this series I have made the comment that this has been happening when fundamentals have really not changed very much.  That comment generated some pushback from readers.  Therefore, it might be fitting that I clarify my remark and perhaps put it in its proper context.

First, the fundamentals of virtually every company are constantly changing.  To me this is simply another way of saying that fundamentals are dynamic.  Individual companies will have good and bad quarters and good and bad years.  Frankly, I have never witnessed any company that produced consistently perfect fundamental results.  Therefore, what my comment was suggesting is that a moderate growing company tends to stay a moderate grower and a fast grower tends to stay a fast grower.  Moreover, consistent dividend payers tend to remain consistent dividend payers.  However, that does not mean to say that every company will grow at precisely the same rate every quarter or every year, nor does it say that every dividend growth stock will increase their dividend by precisely the same rate either.

The point is that companies will generally maintain certain fundamental characteristics that will modestly vary from one year or one quarter to the next, but do not materially change.  On the other hand, what can change dramatically over short periods of time is the valuation that the market is applying to any given stock.  Consequently, valuations can become irrationally high or irrationally low when the stripes, so to speak, of the company have not materially changed.  This is classically the Ben Graham metaphor: “in the short run the market is a voting machine, but in the long run it’s a weighing machine.”

Therefore, in as plain English as I can, this series of articles has thus far been discussing dividend growth stocks where valuations have gone from irrationally high to either fair value or lower.  Furthermore, in each case the primary reason is because valuations had become too high and are now moving to more rational levels.  With that said, it is not uncommon to see a piece of bad or troubling news or information acting as a catalyst.  However, as I have stated before, extremely overvalued stocks are vulnerable to even a hint of bad or negative information or news.  Nevertheless, it is my contention that the primary factor causing the price drops of the companies covered thus far was overvaluation.  Moreover, with each video I produce I will be providing what I consider clear evidence to support that contention.

Campbell Soup is Not a Dividend Growth Stock

I have had several requests from readers to include Campbell Soup Company (CPB) in my current series of articles on dividend growth stocks.  Therefore, I offer this article where I will provide a FAST Graphs analyze out loud video on Campbell Soup.  However, I want to be very clear that I do not consider Campbell Soup a dividend growth stock.  In addition to the reader requests, the reason I have decided to cover this company in my series of dividend growth stocks is because I believe it provides significant lessons on the importance of valuation.

Campbell Soup has paid dividends since it went public in 1954.  However, it has not consistently increased its dividend.  There have been numerous times when the company froze its dividend and they cut their dividend by approximately 30% during the recession of 2001.  Therefore, Campbell Soup is certainly a dividend paying stock, however, I do not consider it a dividend growth stock for the reasons cited above.  On the other hand, and despite the dividend cut and freezes cited above, Campbell Soup’s dividend has grown at an average of 3.4% since 1999.  Stated more clearly, for me to classify a stock as a dividend growth stock, I need to see consistent uninterrupted dividend growth.  Campbell Soup unfortunately fails that test.

Campbell Soup: Speculative Capital Gain Potential?

Considering everything I’ve written thus far, you might conclude that I do not think Campbell Soup is currently an attractive investment.  However, that assumption would be erroneous.  Based on an analysis of the fundamentals, I would suggest that Campbell Soup is selling at a significant discount to its true worth valuation.

Stated differently, I believe the market has significantly overreacted and driven the price far below reasonable or sound levels.  Consequently, I believe the stock offers significant short to intermediate term capital appreciation potential coupled with a high current yield.  Much of my opinion is predicated on my belief that Campbell Soup is in no danger of not continuing as an ongoing concern.  It might not grow very much, but I doubt that the company is in any danger of going out of business for a long time to come.

Furthermore, Morningstar suggests that:

“Campbell has amassed a wide economic moat, resulting from both intangible assets and a cost advantage.  But operating as a leading packaged food manufacturer “holding nearly 60% share of the U.  S.  soup aisle, Campbell is a valued partner for retailers, supporting the firm’s intangible asset moat source.”

Additionally, Morningstar assigns Campbell Soup a fair value of $48.50, which is significantly higher than its current $33 market value.  As I will illustrate later in the video portion, several valuation measurements utilizing FAST Graphs would support fair value levels approximating Morningstar’s calculation.

Also, as the following graphic taken from Campbell’s website indicates, the company is more than just a soup provider.  And Morningstar suggests that the company will be stepping up research and development as well as their marketing efforts going forward.

Campbell Soup Company: FAST Graphs Analyze out Loud Video

Although high future growth is not one of Campbell Soup’s strengths, the company does possess more than adequate resources to continue as an ongoing concern.  Consequently, I would argue that its current valuation represents an enticing short to intermediate term investment opportunity.  However, that contention is driven more by P/E ratio and price to cash flow expansion than it is on growth.  With the following video I will provide precise calculations supporting a best, worst and most likely case scenario for the company over the next couple of years.

Summary and Conclusions

I consider Campbell Soup an extremely undervalued stock with speculative appeal.  At current valuations, the company offers attractive short to intermediate term capital appreciation potential and its high current dividend yield pays you handsomely to wait.  Moreover, I believe that both operating cash flow and free cash flow support a continuation of the dividend going forward.

On the other hand, I am not comfortable suggesting that Campbell Soup represents a great long-term buy-and-hold opportunity.  Nevertheless, today’s low valuation might be too compelling to ignore.  Finally, as always, I suggest that the reader conduct their own research and due diligence and invest according to their own goals, objectives and risk tolerances.

In case you missed them, here are links to Part 1 on General Mills (GIS), Part 2 on Kimberly-Clark (KMB) and Part 3 on 3M (MMM).

Disclosure:  No position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Please follow and like us:

Leave a Reply