For most of my career, food stocks have been thought of as a defensive play. After all, no matter what else happens in the world people still have to eat, and many of these food companies also have the benefit of being nice dividend stocks.
The food companies that make and sell products may not be wildly profitable, but as long as the economy got a little better and there were more people this year than last, these dividend stocks do well.
Buy food and sleep well at night has pretty much been the mantra as long as I have been around.
That’s been even more so in the past few years as investors have looked for safe dividend stocks that could help them meet their income needs. No matter what happened in Greece of how many countries Vladimir Putin invaded, kids would still clamor for macaroni and cheese and their parents would drink their Maxwell House to jump start the day.
Kraft Foods Group Inc (NASDAQ:KRFT) paid a pretty good dividend. People would always want their Cheerios and Frosted Flakes, so Kellogg Company (NYSE:K) was a pretty safe bet with a good dividend as well.
That approach has worked pretty well for several years now but the food party maybe drawing to a close.
There is too high a price for everything, including food companies. The industry has seen a lot of consolidation and everyone is betting on who buys who next.
The tailwinds for the industry are well known. Energy prices are down, which should help the bottom line. The price of many commodities — including grains, pork, orange juice, coffee, rice and sugar — are down substantially over the past year.
There has been a lot of merger and acquisition activity and most analysts expect more. That’s a pretty cheerful outlook and as Warren Buffett once told us, a cheery consensus is expensive on Wall Street.
If you measure food stocks on traditional metrics, they are very expensive right now.
Kellogg trades with a price-to-earnings ratio of 51, 9 times book value and has an enterprise-value-to-EBITDA ratio of 18. For General Mills, Inc. (NYSE:GIS) the numbers are 24, 6 and 14, respectively. Hormel Foods Corp (NYSE:HRL) has a line of 24, 4 and 13.
The simple truth is that even though people have to eat — no matter what is going on in the Middle East or what the unemployment rate is — food company stocks are just too high to merit purchase at current levels.
The only cheap food stock I was able to find is Seneca Foods Corp (NASDAQ:SENEA). While the stock is not attractive on a P/E or EV/EBITDA levels, it does trade at just 80% of book value right now.
Seneca makes canned, frozen, and bottled produce and snack chips under a wide range of brand names, including Seneca, Libby’s, Aunt Nellie’s, READ and Seneca Farms. It also packs canned and frozen foods for the Green Giant and le Suer labels owned by General Mills.
Seneca just announced it will take advantage of the current low valuation by expanding its share repurchase program. It still has 580,000 shares under the current buyback plan and it extended that to a total of 2.5 million common shares. There are only 11.8 million shares outstanding and 7.5 million in the float of the Class A shares and 2.2 million of the B Class, so that’s big buyback plan relative to capitalization.
Long-term patient buyers should do very well with this food company.
Most food company stocks are just too expensive to make sense for long-term investors right now. Seneca is the lone exception I can find.
As of this writing, Tim Melvin does not hold a position in any of the aforementioned securities.
