Numerous boring companies get the cold shoulder from investors because the companies are, well, boring. The mistake with this approach is that you might overlook some stalwarts — solid companies that perform modestly well year after year, pay a nice dividend and provide stability for your portfolio. Today I’ll see if Campbell Soup Co. (NYSE:CPB) fits that category, since the last time I looked at it for my own portfolio (in 2004), it did.
The company makes a lot more than just soup. It offers condensed and ready-to-serve soups; broth, stocks, and canned poultry; pasta sauces; Mexican sauces; canned pastas, gravies and beans; juices and beverages; and tomato juices. Its Global Baking and Snacking division provides cookies, crackers and bakery and frozen products all over the world. Its North America Foodservice segment distributes various products, such as soup, specialty entrees, beverage products, other prepared foods and farm products through various food service channels in the United States and Canada. The company markets its products directly, as well as through broker and distributor arrangements. Its customers include retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drugstores and other establishments.
The primary driving factors for Campbell Soup are the economy and competition. You wouldn’t necessarily think the economy matters, given that many of Campbell’s products are considered necessities. The problem is that aside from the regular competition Campbell faces, the economy has driven consumers to the newest competitors that are much cheaper — private labels of the very grocery stores where Campbell products are offered.
Analysts looking five years out do not see good times for Campbell Soup — they see annualized growth of only 4%. Earnings are expected to fall 6% this year, then climb back to 2010 levels in FY 2012. Despite this, the company trades at a P/E of 13. For a stock to be so overvalued, it better have one amazing balance sheet and cash flow statement.
The company carries $254 million in cash and $1.94 billion in debt, which is being serviced annually at about 6%. Trailing 12-month cash flow was $887 million, about 4.2 times what the company pays out in dividends.
There is something intriguing about Campbell’s ownership. Union Heritage Capital Management owns 35% of the company. It provides portfolio management services, which suggests it is holding the stock as part of many different portfolios. That Campbell pays a 3.7% dividend suggests the stock is part of pension funds that don’t like risk.
Conclusion
I think of Campbell Soup as I do AT&T (NYSE:T). It’s essentially a no-growth company that throws off reliable free cash flow. The only difference between these two companies is that AT&T is not nearly as overvalued on a P/E basis as Campbell is. I see Campbell Soup’s story as not only boring, but not worth the trouble. If you want a stock for a dividend, I’d pick one that’s not as overvalued.
My suggestion is to retirement investors: Avoid Campbell Soup. There’s too much potential risk to your capital on the downside, and a 3.7% dividend doesn’t provide enough of a hedge. If you hold it in either your regular or retirement accounts, I’d recommend selling it. Aggressive investors might want to consider shorting the stock, although downside gains are limited because if pension funds like the stock, they’ll find an excuse to buy.
Lawrence Meyers does not own shares of any companies mentioned.
