• Tyson had a decent quarter but the results reveal the impact of inflation.

  • Tyson is a deep value relative to its peers because of the dividend.

  • The guidance for the full year is favorable.

Shares of Tyson Foods (NYSE: TSN) are down more than 9.0% in the wake of the Q2 earnings report and offering a discount to investors. The stock is trading at about 9.6X its earnings compared to competitors like Hormel Foods (NYSE: HRL) which trades closer to 26X its earnings and even Kraft-Heinz (NASDAQ: KHC) which trades near 14X earnings but there is a difference.

Hormel is paying far more of its earnings in dividends and Kraft-Heinz far more in yield and both have at least as healthy an outlook for dividend growth as Tyson Foods. The question for investors now is if support will hold at the $81 level or fall through on the tightening margin. 

Tyson falls on mixed quarter 

Tyson had a decent quarter but the results reveal the impact of inflation and lack of COVID stimulus in the economy. The company’s $3.5 billion in net revenue is up 8.2% versus last year and beat the consensus by 190 basis points but due in total to higher pricing. The company says volume declined by 1.9% versus last year and was offset by an 8.1% increase in pricing and the internal metrics are even more mixed. On a segment basis, the Chicken and Prepared Foods segments grew and widened margins while the Beef and Pork segments were flat to down and saw their margins contract. In regard to chicken and prepared food pricing, those segments are up 20% and 14% each, and market fundamentals are supportive of pricing over the next year. 

Moving on to the margin and earnings, the company reported a contraction in both the GAAP and adjusted operating margins with the adjusted margin shrinking 340 basis points to only 7.4%. This resulted in GAAP EPS of $2.07 which is up 1% YOY and adjusted EPS of $1.94 or down 28% YOY. The worst part of the news is that margin contracted more than expected and resulted in a $0.03 miss in adjusted earnings despite the top-line strength but there are some mitigating factors including an increase in investment activities. 

The guidance for the full year is favorable although there is risk in the outlook. The company is expecting to see revenue in the range of $52 to $54 billion in net revenue with margin improvement in 3 of the 4 segments versus the Q3 results. This compares to the consensus revenue target of $52.75 billion and has the company on track to exceed the full-year EPS outlook by a double-digit margin of error. The risk is that Q4 revenue is projected to grow 7% sequentially and 13% YOY which may be a tough bar to beat. 

Tyson dividend growth is safe 

Tyson is a deep value relative to its peers but that may be because of the dividend. The stock is paying out 2.1% in yield compared to Hormel’s 2.1% but there is a potential catalyst in the numbers. Tyson’s payout is only 18% of its earnings estimate compared to over 50% for Hormel. The potential catalyst is a dividend increase and/or increases that would put the Tyson payout in-line with its closest peer. Based on the balance sheet and outlook, a single large increase is unlikely but investors should expect to see the 10-year history of increases extend indefinitely and at an aggressive double-digit pace. The company has been increasing at a 17% CAGR the last 5 years and could easily continue at this pace. 

The technical outlook: Tyson breaks support 

The price action in Tyson Foods stock fell more than 9.0% in the wake of the earnings report but may find support at or near the $82 level. If this level can hold, the stock should move sideways within this range for the foreseeable future. If not, shares of Tyson may fall down to the $75 level or lower where the value and dividend would be even more attractive. 

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