Tyson Foods: Cultivating the Benefits of Protein

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Founded in 1935, Tyson Foods (TSN) is one of the largest processors and marketers of chicken, beef, pork and a number of other food products in the world.

The Company’s integrated operations include breeding animals, contract farmers, feed production, processing, marketing and transportation of chicken and related specialty products, including feed ingredients and pets. Through its wholly owned subsidiary, Cobb-Vantress, Tyson is also one of the world’s leading suppliers of poultry breeders. In addition to its food-related businesses, Tyson is able to generate additional value from specialty products such as hides.

I am neutral on the title.

Tyson’s performance in an inflationary environment

One of the most critical concerns currently troubling the world is the possibility of food shortages in the coming months following the ongoing invasion of Ukraine, in addition to ongoing supply chain issues. Both Ukraine and Russia are major suppliers of basic necessities such as grains and oilseeds. With the former unable to produce optimally while having its ports blocked and the latter sanctioned, western counties could suffer from lack of these agricultural supplies.

The effects of this crisis are already evident in the shortage of certain products in supermarkets and the soaring prices of many basic products. For example, US wheat futures prices nearly doubled from a year ago.

Since Tyson is a major food producer, the company currently enjoys increased operating leverage. With food prices rising due to high inflation and fears of potential shortages, Tyson’s results have already started to benefit. In fact, the company is expected to make record profits this year. Remember that food is highly inelastic because it is a necessity, and therefore consumer demand is less affected by higher prices, as evidenced by the company’s most recent results.

In its fiscal 2022 second-quarter results, Tyson reported sales of $13.1 billion, a 16% increase over the prior year period. The quarter also marked the best three-month period in company history in terms of sales. Strong sales were driven by gains across the board, with beef, pork, chicken and prepared food sales up 23.8%, 10.8%, 14.4% and 15. 9%, respectively.

While some segments even saw lower sales volumes, the company saw double-digit gains on higher pricing across all categories, due to the current environment, as previously described. With stronger pricing and higher margins, adjusted operating profit was $1.16 billion, up about 57% from a year ago. Per share, adjusted earnings were $2.29, compared to $1.34 in Q2 2021, suggesting an increase of around 71%. The significantly higher increase is due to the company’s aggressive buybacks over the past four quarters, which continued into the second quarter. Specifically, in the second quarter alone, the company repurchased 6.2 million shares for approximately $523 million.

In its earnings report, the company cited the United States Department of Agriculture (USDA), whose indicators predict that domestic protein production (beef, pork, chicken and turkey) should be relatively flat over the in fiscal 2022 from fiscal 2021 levels. Based on this and its current pricing power, Tyson raised its expectations for fiscal 2022, expecting to achieve sales between $52 billion and $54 billion, up from $49 billion to $51 billion.

Based on this outlook and the company’s profit margin outlook, I estimate that the company will achieve adjusted earnings per share of approximately $9.00 for the year. This is consistent with consensus estimates, the average of which indicates adjusted earnings per share of approximately $9.09 for the full year. Either way, these levels should mark another year of record profitability for the company.

Return on capital and valuation

Tyson Foods has a long history of returning capital to shareholders, both in the form of dividends and share buybacks. Specifically, the company has increased its dividend every year for ten consecutive years and has never reduced it since 1997. Over the past five years, dividends have increased at a CAGR (compound annual growth rate) of 17.2 %, and while the latest dividend hike of just 3.4% may imply slower growth, the payout ratio remains quite healthy at just over 20% (assuming full year EPS of 9. $00).

Additionally, the company has actively repurchased its own shares over the years, which has reduced its share count by approximately 11% since 2015. Over the past four quarters, the company has repurchased approximately $544 million shares, and assuming redemptions were to continue at this rate, this would imply a “redemption yield” of around 1.7%. Combined with the current dividend yield of 2.1%, the stock currently offers a combined return to investors of approximately 3.8%.

In terms of valuation, assuming FY2022 EPS of $9.00, the company currently trades at around 9.8 times its underlying net income. In my opinion, this is an overall fair multiple for the stock. While it may sound humble, earnings could face headwinds if the company were to (for whatever macroeconomic reason) cut its currently high prices in the coming years. So, this multiple provides a decent margin of safety against such a scenario.

The Taking of Wall Street

As far as Wall Street is concerned, Tyson Foods has a consensus holding rating based on three holds and one sell assigned over the past three months. At $93.00, Tyson Foods’ average price target implies 6.31% upside potential.

Carry

Tyson Foods benefited from the ongoing inflationary environment, with strong pricing power leading to higher margins and record profits. The company also has a remarkable track record of capital returns, while the combined investor return attached to the stock is currently quite decent.

With stocks trading at a fair valuation, dividend-growing investors may want to consider Tyson Foods for their portfolio. That said, the risks are still present, with the company’s currently fantastic pricing power likely to subside assuming the current inflationary environment eases and concerns over food shortages ease.

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