Founded in 1935, Tyson Foods (TSN) is one of the largest processors and marketers of chicken, beef, pork, and a number of other food-related products in the world.
The company’s integrated operations comprise breeding stock, contract farmers, feed production, processing, marketing, and transportation of chicken and related specialty products, including animal and pet food ingredients. Via its wholly-owned subsidiary, Cobb-Vantress, Tyson is also one of the leading poultry breeding stock suppliers worldwide. In addition to its food-related activities, Tyson is able to drive additional value from specialty products such as hides.
I am neutral on the stock.
Tyson’s Performance During an Inflationary Environment
One of the most critical concerns currently troubling the world is the possibility of food shortages in the coming months as a result of the ongoing invasion of Ukraine, on top of the ongoing supply chain issues. Both Ukraine and Russia are major suppliers of necessity-type commodities such as grain and oilseeds. With the former unable to optimally produce crops while having its ports blocked and the latter being sanctioned, Western counties could suffer from the lack of such agricultural supplies.
The effects of this crisis are already evident in the lack of some products in supermarkets and the skyrocketing prices of many major commodities. For instance, U.S. wheat futures have nearly doubled compared to last year.
Since Tyson is a major food producer, the company currently enjoys increased operating leverage. With food prices on the rise as a result of elevated inflation and fears of potential shortages moving forward, Tyson’s results have already started benefiting. In fact, the company should achieve record earnings this year. Don’t forget that food is highly inelastic as it’s a necessity, and thus consumer demand is less affected by higher prices, as proven in the company’s most recent results.
In its fiscal Q2 2022 results, Tyson recorded sales of $13.1 billion, a 16% increase compared to the prior-year period. The quarter also marked the best three-month period in the company’s history in terms of sales. Elevated sales were driven by gains across the board, with Beef, Pork, Chicken, and Prepared Foods sales up 23.8%, 10.8%, 14.4%, and 15.9%, respectively.
While some segments even saw declining sales volumes, the company recorded double-digit gains from higher pricing across all categories, driven by the current environment as described earlier. With stronger pricing moving margins higher, adjusted operating income came in at $1.16 billion, up roughly 57% compared to last year. On a per share basis, adjusted earnings equaled $2.29 compared to $1.34 in Q2 2021, suggesting an increase of around 71%. The notably higher increase was due to the company’s aggressive buybacks over the past four quarters, which further continued into Q2. Specifically, during Q2 alone, the company repurchased 6.2 million shares for around $523 million.
In its earnings report, the company cited the United States Department of Agriculture (USDA), whose indicators project that domestic protein production (beef, pork, chicken, and turkey) should be relatively flat in fiscal 2022 compared to fiscal 2021 levels. Based on this and its current pricing power, Tyson boosted its expectations for fiscal 2022, projecting to achieve sales between $52 billion to $54 billion, up from $49 billion to $51 billion.
According to this outlook and the company’s profit margin prospects, I estimate that the company will achieve adjusted earnings-per-share of around $9.00 for the year. This matches consensus estimates, whose average point towards adjusted earnings-per-share of around $9.09 for the full year. In any case, these levels should mark another year of record profitability for the company.
Capital Returns & Valuation
Tyson Foods features a prolonged track record of returning capital to shareholders, both in the form of dividends and stock repurchases. Specifically, the company has hiked its dividend annually for ten consecutive years and has never cut it since 1997. Over the past five years, dividends have grown at a CAGR (compound annual growth rate) of 17.2%, and while the latest dividend hike of just 3.4% may imply a slowdown in growth, the payout ratio remains quite healthy at just over 20% (assumes FY EPS of $9.00).
Further, the company has been actively buying back its own stock over the years, resulting in reducing its share count by around 11% since 2015. Over the past four quarters, the company has repurchased around $544 million worth of stock, and assuming buybacks were to continue at this rate, it would imply a “buyback yield” of around 1.7%. Combined with the current dividend yield of 2.1%, the stock currently offers a combined investor yield of around 3.8%.
In terms of its valuation, assuming EPS of $9.00 for fiscal 2022, the company currently trades at around 9.8 times its underlying net income. In my view, this is an overall fair multiple for the stock. While it may be seemingly humble, earnings could face headwinds if the company has to (for whatever macroeconomic-related reason) reduce its currently elevated prices in the coming years. Thus, this multiple provides a decent margin of safety against such a scenario.
Wall Street’s Take
Turning to Wall Street, Tyson Foods has a Hold consensus rating based on three Holds and one Sell assigned in the past three months. At $93.00, the average Tyson Foods price target implies a 6.31% upside potential.
Takeaway
Tyson Foods has been a beneficiary of the ongoing inflationary environment, with strong pricing power leading to expanding margins and record profits. The company also features a noteworthy track record of capital returns, while the combined investor yield attached to the stock currently is rather decent.
With shares trading at a fair valuation, dividend growth investors may want to consider Tyson Foods for their portfolio. That said, risks are still present, with the company’s currently fantastic pricing power likely to soften assuming the current inflationary environment eases, and concerns over food shortages decompress.
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