This S&P 500 dividend stock yields 9.8%. Should I buy it?

Engaging earnings shares don’t exist simply on the UK stock market. Reasonably, throughout the pond within the S&P 500, there are numerous examples of shares with excessive yields. In fact, this doesn’t imply that every one are price shopping for. Nonetheless, when I noticed one with a dividend yield of 9.8%, I determined it was time to dig deeper!

A client staples large

I’m speaking about Conagra Manufacturers (NYSE:CAG). Even for those who haven’t heard of the father or mother firm, you’ll most likely know a few of the manufacturers it owns. It’s the maker of Birds Eye greens, Wholesome Alternative meals, and different meals merchandise. Over the previous 12 months, the share value has fallen by 40%, pushing the dividend yield to 9.8%.

Let’s handle the stock fall first. The largest challenge has been inflation. Meat, packaging, freight, and commodity prices have surged, negatively impacting profitability. Final month, a quarterly replace confirmed it expects price inflation of a whopping 7% this 12 months alone. This is being pushed partly by tariffs and rising protein costs.

On the similar time, buyers have gotten extra price-sensitive. Many customers are buying and selling right down to cheaper private-label alternate options as a substitute of shopping for branded frozen meals and snacks. Reported internet gross sales for the fiscal Q3 decreased by 1.9% versus the identical interval final 12 months.

Dividend attraction

Regardless of these worries, the dividend yield does look enticing. Close to 10%, it’s terribly excessive for a client staples firm. Extra importantly, the corporate has paid dividends repeatedly because the Seventies.

But when assessing if the payout is sustainable, it’s a tricky query to obviously reply. Even after current earnings strain, Conagra continues to generate substantial money movement. For instance, within the newest quarter, it generated $896m in internet money movement. Administration has just lately refinanced debt and reiterated its dedication to shareholder returns, corresponding to through dividends.

There are additionally indicators that components of the enterprise could also be stabilising. CEO Sean Connelly stated within the newest replace that he was seeing “continued upward inflection in our Frozen and Snacks companies”. These two areas just lately returned to modest natural development. If inflation moderates and pricing strain eases, earnings may recuperate quicker than traders count on. This, in flip, would help the dividend.

Overarching considerations

Even with the potential inexperienced shoots rising, debt stays elevated following years of acquisitions. At $7.3bn, it’s nonetheless appreciable! Additional, Walmart accounts for almost 30% of gross sales, creating main buyer focus threat. And if inflation stays stubbornly excessive with added strain from the current power value shock, revenue margins might be squeezed much more.

On that foundation, I assume there are higher dividend shares that provide a extra interesting risk-to-reward ratio. I consider this holds true each for US shares and UK alternate options. Nonetheless, traders with a better threat tolerance than me may wish to take into account it.