If you bought a share of Campbell Soup (CPB) back in 2000, your share would have earned $1.65 in profit and you would have collected $0.90 in dividends. Today, Campbell Soup earns $3.05 in profit and pays out $1.40 per share in cash dividends. This means that over the past sixteen years, earnings have grown by 3.9% annually and dividends have gone up by 2.8% each year.
This is not a business that serves the role of inflation hedge or stable dividend cash generator in a portfolio. It serves in the realm of wealth preservation rather than wealth building. There is value in that–each share paid you $0.88 in 2008 dividends, $1.00 in 2009 dividends, and $1.08 in 2010 dividends. It is a sign of intelligent estate planning to own business interests that not only maintain but grow their cash payout during periods of economic distress.
However, when you contemplate the purchase of low growth yet stable businesses, it is imperative that you get the initial valuation right. If you overpay for a fast-growing business like Visa, Nike, or Alphabet, it is not a fatal mistake because you 14% earnings growth can still translate into 9-11% annual returns after adjusting for P/E compression. When you have to combine mid single digit growth with P/E compression, though, you don’t get relief for your undisciplined purchase.
I am looking at the “earnings beat” from Campbell Soup that came out this morning in which earnings were $0.05 higher than expected and profit margins were two percentage points higher than expected. The stock is up almost 5% today on the news with the soup-maker trading at $57 per share.
This is irrational to me. Campbell Soup is only a business that you can only hope for 5-6% growth over the long haul. Today’s “good news” didn’t even give investors that. Quarterly sales were actually down 1%, though Campbell Soup expects sales to go up 1.5% overall this year. Management signalled earnings growth between 2% and 5% for the year ahead.
My prediction is that Campbell Soup will only earn about $4 per share in profits somewhere between 2023 and 2025. If it trades at a valuation of 17.5x earnings with higher interest rates, the stock will only trade somewhere around $70 per share. It’s at $57 right now! You get a 2.5% dividend, and you are only looking at about $13 per share in expected capital gains over the next seven to nine years.
There are absolutely no tailwinds or growth catalysts in the soup business, which account for almost 70% of its overall sales. It just hums along with a percentage or two increase here and there. The upside is that the revenues, profits, and dividends don’t fall during recessionary times. When a business has these type of characteristics, you absolutely must not overpay. The phrase “premium price” should never cross your mind if you place a buy order for a business like this.
The stock has come down from its 2016 high of $67 per share, but it has not come down yet to a rational price that will set you up for long-term returns. The right way to invest in a corporation like Campbell Soup is to buy it during troubled times (say, a price around $40 per share or lower) and then take the dividends as cash elsewhere to deploy into faster growing businesses each year. There is a time and place for initiating investments in business like Campbell Soup, but right now is not it.