A Renegade Buy Signal: A Dividend Cut

Clearly, there must be a typo in that headline. I’m the one who is always preaching about getting the yield you deserve. So, why would I even consider buying a company that can’t keep its payouts reliable? 

The short answer: because sometimes a cut now is the right decision for long-term investors. 

Money is a finite resource, unless you happen to be the US government, but that’s a different story. For people and businesses, there are only so many dollars at our disposal. 

Management teams have to decide what to do with each dollar of profit: 

• Keep it as cash for a rainy day

• Reinvest it back into the business via R&D, marketing, debt payoff, etc.

• Distribute it to the owners, aka shareholders, as dividends 

Companies in a growth phase will be heavily reinvesting their profits into the business. Thriving mature businesses may not have to invest as aggressively, leaving more of the pie for dividends. It’s a delicate balance. 

I know it sounds a little dramatic, but the future of any company—and your investment—depends on the right amount of money being used to support and grow the business. That’s true whether it ever pays a dividend or not. 

For income investors like us, there is another layer to this balance. We are following company behavior to ensure that we’ll continue to receive our dividends. 

Since it’s my job to keep an eye on all things dividend investing, I watch for any dividend suspensions or cuts… and there is one in particular that caught my attention last week. 

An Industry Under Stress 

The middle aisles of a grocery store have been struggling for the past few years. Inflation has been shrinking consumers’ pocketbooks, and now GLP-1s are changing the way 11% of Americans purchase food. 

Consumer staples companies are trying everything they can think of to adapt. Some have cut prices in an attempt to trade margins for volumes. Some are innovating by adding protein to just about anything. But consumers are still reaching for fresher ingredients and private labels in those middle aisles.

Conagra Brands (CAG) is one of the middle-aisle grocery giants that is struggling. It’s the parent company of Hunt’s tomato products, Vlasic pickles, Orville Redenbacher’s popcorn, and Banquet meals. Those are just a few of its over 100 brands. 

Its revenue peaked in 2023 at $12.2 billion and has been declining ever since. Shares have also collapsed since hitting a high of $41.03 back in January 2023.  

The stock has crashed 64% in a little over 3.5 years. But a closer look shows you that investor sentiment has recently changed—shares are up 13.9% in the past month. The catalyst? Cutting the dividend in half. 

Last week, Conagra’s new President and CEO John Brase did what investors suspected would happen. With the dividend cut now behind us, it’s no longer being priced into the shares. 

The cut also lowered the dividend payout ratio closer to 50% from 80%, and its sustainability is much more probable. 

Is that enough to recommend Conagra? 

Déjà Vu or a Different Ending 

The dividend cut is part of a bigger strategy to guide Conagra back to a path of growth. It was Brase’s first earnings call and he took no time to change the narrative of the former team. Here’s the focus of the new plan: 

• Restore margins and stability

• Increase investment in brands and supply chains

• Simplify and reduce complexity in the portfolio and organization

• Rebalance capital allocation

Although vague, it sounds like a good plan. This isn’t my first rodeo with management waving around a strategic plan that promises a more stable future. 

What stops me in my tracks is that this sounds eerily like the B&G Foods (BGS) strategic plan. I initially thought that one was good, too… until quarter after quarter passed with no progress. 

I ended up taking a massive loss on a position because management just couldn’t seem to execute a plan. 

Conagra’s management said more details on the long-term strategy will come early in the 2027 calendar year, and I’ll be watching. We should expect to see progress on reducing the number of SKUs. And I want to see the reasoning behind which businesses will be kept and which might be divested. 

I do think Conagra is a good deal at these prices. Even after the cut, its current yield is still 4.6%. However, we need to see the details on its strategic plan and progress on reaching those goals before considering these shares a solid buy. 

For now, the dividend cut is a good first step, and a green flag to add these shares onto our watchlist.