2 Ultra-High-Yield Dividend Stocks at 10-Year Lows to Buy in July

Globe and Mail

20 hours ago

Key Points
The packaged food industry is facing its largest downturn in over a decade.
Consumers are seeking alternatives amid growing health concerns and lifestyle changes.
Conagra Brands and Campbell's have become too cheap to ignore.
10 stocks we like better than Conagra Brands ›
Packaged food giants Conagra Brands (NYSE: CAG) and The Campbell's Company (NASDAQ: CPB) are both down more than 25% year to date and are hovering around their lowest levels in over a decade.
Both companies are industry giants. Conagra owns brands like Orville Redenbacher's, Slim Jim, Boom Chicka Pop, Hunt's, Reddi-Wip, Marie Callender's, and more. In addition to its flagship soup line, Campbell's also owns a variety of pasta sauce and dip brands, as well as snacks like Pepperidge Farm, Kettle, Cape Cod, Snyder's of Hanover, Lance, Goldfish, and more.
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Conagra and Campbell's stocks are so beaten down that they yield 6.8% and 5.1%, respectively.
Here's why the sell-off in both high-yield dividend stocks is a buying opportunity for patient investors.
A severe slowdown
The packaged food industry has faced numerous challenges in recent years. Most recently, pullbacks in consumer spending and inflation have pressured consumer goods companies -- but the downturn is particularly bad for packaged food names.
Packaged food companies are facing macroeconomic headwinds and changes in consumer behavior. A shift away from processed and packaged foods toward healthier options presents a significant challenge for the industry. Especially from companies that sell frozen and processed meals rather than just snacks and beverages.
The Trump administration established the Make America Healthy Again Commission to address U.S. health concerns. In April, the U.S. Department of Health and Human Services and U.S. Food and Drug Administration announced measures to phase out all petroleum-based synthetic dyes and replace them with natural ingredients.
On June 25, Conagra announced that it would remove Food, Drug & Cosmetic (FD&C) colors from its U.S. frozen product portfolio by the end of 2025. The company also stated that it will not offer products with FD&C colors sold to K-12 schools beginning with the 2026 through 2027 school year and will discontinue the manufacturing of products with FD&C colors in its U.S. retail portfolio by 2027. Conagra's peers, like General Mills, Kraft Heinz, and others, made similar announcements in June.
The regulatory pressure throws a wrench in an already challenging operating environment for the industry, but it could be a net positive in the long run.
Acquisition remorse
In addition to macro challenges and paradigm shifts in the industry, some packaged food companies have also been dealing with the aftermath of bad acquisitions.
In 2018, Conagra bought Pinnacle Foods for $10.9 billion -- a disastrous move in hindsight, given the market cap of Conagra at the time of this writing is just $9.7 billion. That same year, Campbell's bought Snyder's-Lance for $6.1 billion -- making the company a major player in the snack category through chips, pretzels, popcorn, nuts, and cookies.
Campbell's then bought Sovos Brands for $2.7 billion in March 2024 to diversify its product lineup through pasta sauces, dry pasta, frozen entrees, frozen pizza, yogurt, and more soup varieties. The acquisition isn't terrible, as it opens the door to more premium brands. But it did add debt to Campbell's balance sheet. Having to manage a larger interest expense makes it even harder for the company to navigate industrywide challenges.
Combined, those two acquisitions cost Campbell's $8.8 billion, nearly as much as its market cap at the time of this writing of $9.2 billion. Like Conagra, Campbell's overpaid for these brands in hindsight.
Conagra's and Campbell's revenues have steadily climbed over the past few years, but that's mainly due to acquisitions -- not organic growth. Meanwhile, operating margins have significantly fallen due to weakening demand.
CAG Revenue (TTM) data by YCharts
In response to the poor results, both stocks are now at their lowest levels in over a decade, which has boosted their dividend yields to their highest levels in that period.
CAG Dividend Yield data by YCharts
Two high-yield stocks at attractive valuations
As bad as Conagra's and Campbell's results have been, both companies remain impeccable cash cows.
Conagra's free cash flow (FCF) per share is $3.02 compared to its $1.40 dividend per share, while Campbell's has $2.41 in FCF per share compared to a dividend per share of $1.52. So although both companies are experiencing weakening balance sheets, at least they can still support their dividends with cash from the business.
In terms of valuations, both stocks are dirt cheap -- with Campbell's sporting a 12.8 price-to-FCF and 10.5 forward price-to-earnings (P/E) ratio compared to just a 6.8 price-to-FCF ratio for Conagra and an 8.3 forward P/E.
For context, Campbell's 10-year median price-to-FCF ratio is 15.8 and Conagra's is 16.3 -- illustrating just how severely discounted these stocks are compared to their historical averages.
Conagra and Campbell's have fallen far enough
Conagra and Campbell's have been hit with a four-pronged punch of self-inflicted poor decision-making, shifts in consumer behavior, macro challenges, and regulatory changes. However, both stocks are dirt cheap and generate plenty of cash to support their high dividends.
Conagra reports earnings on July 10, which will give investors a better idea of where the company is headed and the impact of changes to its food ingredients and additives.
At their lowest levels in over a decade, now is a good time for income investors to scoop up shares of Conagra and Campbell's despite both stocks being heavily out of favor.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool recommends Campbell's and Kraft Heinz. The Motley Fool has a disclosure policy.