A major acquisition is one way this well-known food company is facing the challenges of changing consumer demands.
The purchase of a major snack maker will diversify its product line and push annual sales up above $10 billion. The company is also making adjustments to meet the desire for more healthful food. At the same time, it maintains a dividend yielding 3.4%.
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CAMPBELL SOUP CO. (New York symbol CPB; www.campbellsoupcompany.com) makes a variety of foods under popular brands such as Campbell’s (condensed soups), V8 (beverages), Goldfish (snacks) and Bolthouse Farms (fresh carrots).
Campbell has completed its acquisition of Snyder’s-Lance Inc. (Nasdaq symbol LNCE). Its products include pretzels, sandwich crackers, kettle cooked chips, pretzel crackers, cookies, potato chips, tortilla chips, popcorn, nuts and other salty snacks. Its main brands include Snyder’s of Hanover; Lance; Cape Cod; Snack Factory Pretzel Crisps; Pop Secret; Emerald; Kettle Brand; KETTLE Chips, and Late July.
Campbell paid roughly $4.9 billion in cash for Snyder’s-Lance. If you include that firm’s debt, the purchase price is $6.1 billion.
The combined company has annual sales of over $10 billion. It now gets 47% of its revenue from snacks, 26% from soup, 17% from simple meals and 10% from beverages.
Campbell will borrow $6.2 billion to finance the acquisition. That will increase its long-term debt to $8.5 billion, or 65% of its $13.1 billion market cap (the total value of all outstanding shares).
Blue Chip Stocks: Cost savings help push up earnings in latest quarter
The new operations should begin contributing to the company’s earnings in fiscal 2019 (fiscal years end July 31). As well, Synder’s-Lance will merge with Campbell’s Pepperidge Farm baked goods operations to form a new division called Campbell Snacks. By the end of fiscal 2022, the elimination of overlapping operations will cut $170 million from the company’s total annual costs.
Despite the additional interest and other costs, the company plans to maintain its current annual dividend rate. However, it has suspended its share buyback program to conserve cash.
For the quarter ended January 28, 2018, sales fell 0.7%, to $4.34 billion from $4.37 billion a year earlier. In response to rising demand for healthful food, the company continues to remove artificial colours and flavours from its products.
With slowing demand for canned foods, the company now aims to cut $500 million from its annual costs by the end of the fiscal year ending July 31, 2020. So far, it has saved $365 million. As a result, earnings in the quarter rose 6.8%, to $300 million, or $1.00 a share, from $281 million, or $0.91.
The company last raised its quarterly dividend by 12.2%, with the October 2016 payment. Investors now receive $0.35 a share; the annual rate of $1.40 yields 3.4%. Campbell’s dividend has grown an average of 3.8% annually over the last 5 years.
The company is now expected to earn $3.10 a share in fiscal 2018. The shares trade at 13.3 times that forecast. That’s a reasonable p/e in light of the company’s strong brands and potential to expand in foreign markets, which currently account for just 20% of its sales.
Recommendation in TSI Dividend Advisor: Campbell Soup is a buy.
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