The Bottom Fishing Club: Tyson Foods

If you are searching for a stable, leading food business for your portfolio that pays a high dividend yield, likely to rise nicely over time on a better-than-normal coverage from earnings, the easy pick might be Tyson Foods (NYSE:TSN). The stock quote declined -40% from 2022's peak into March, but is showing signs of a turnaround. The good news for investors is a sound valuation can be grabbed during the 2023 hiccup in profit margins coming off COVID's boom demand for at-home food choices. In fact, the current Tyson price may prove a bargain looking back in 2024, assuming normalized margins on sales return in 12-18 months.

Tyson is one of the top U.S. producers/sellers of frozen and cold meats, especially its main focus on chicken, found at your local grocer. Popular items include Tyson fresh and frozen chicken cuts, Hillshire Farm sliced/processed meats, Jimmy Dean breakfast sausages, Ball Park franks/hot dogs, Sara Lee premium deli meats, aidells sausages, and Fast Fixin' frozen ready to heat and eat meats, just to list a few.

The company has steadily grown over the decades to a point where cash flow since 2015 has bounced between $2 and $4 billion annually. To reach its current size, reinvestment in the business through the acquisition of new brands and capital spending on plant & equipment has kept "free" cash flow more limited. Going forward and because of its large size, I expect management to continue following its latest focus on the return of capital to shareholders (through dividend raises and potential future share buybacks). Based on the company reaction to super-sized free cash flow achieved during the pandemic boom in demand for its products, cash flow generation could be sent to owners at increasing rates into 2025.

Bullish Valuation Story

The first thing you will notice when researching Tyson is its stock price is HIGHLY correlated with the prevailing rates of profit margin on sales. The main excuse for the -40% dump in its share price has been a pivot in margins from excessive to below average this year. To a degree, the meat industry goes through cycles like other businesses. The stretched COVID-related margins of 2020-22 have encouraged new entrants and supply to appear. So, we are in the down part of the cycle for Tyson. Today's margins are the lowest since early 2016.

The bullish view is the company remains wildly profitable, and the return of normalized margins in 2024-25 should jump EPS back into the $5-6 range. Wall Street forecasters are expecting such a scenario.

In terms of the stock's basic fundamental ratio valuation on trailing earnings, sales, cash flow, and book value, Tyson is trading at a lower than 10-year average position right now. If you look only at sales and book value, it is closer to a decade low.

When we include debt and subtract cash holdings, the enterprise value picture does not change the underlying story much. You will note that lower margins and EBITDA are forecast for 2023.

Dividend Income Buy Logic

An even stronger ownership argument may come from the rising dividend payout trend from the company each year, plus its higher current yield available now after the stock selloff into April. Today's 3%+ yield is double the S&P 500 rate (sitting at the largest relative spread ever), with an easily covered from earnings rate of 3.8x compared to 2x to 2.5x from the typical S&P 500 blue-chip business.

The terrific news for Tyson owners is management could increase the dividend payout rate by 50% to 100%, and still be in a conservative zone vs. other companies (given normal profit margins and some sales growth takes place in 2024). In other words, Tyson could afford a 5% to 6% dividend yield payout at today's share price of $62. And, it would still retain enough earnings and cash flow generation to move operations in a growth direction, creating capital appreciation through share quote gains over time. [Warren Buffett and Berkshire Hathaway may want to kick the tires and dig deeper into this idea, in my opinion.]

Technical Trading Momentum

Another reason to consider purchasing a Tyson position is a turnaround in stock trading momentum may be taking place right now, from aggressive sellers having the upper hand to buyers taking control.

On the 18-month trading chart below, I have drawn several important momentum indicators that are highlighting increased buying trends. The Accumulation/Distribution Line and Negative Volume Index readings bottomed in October-November (circled in green), long before the final price lows of March. The new price declines in December and again in March were not confirmed with selling pressure as aggressive as witnessed between August to November.

Next, buying interest as measured by On Balance Volume has really taken off the last 7 weeks. I have marked with blue lines the current OBV spike alongside the last similar ramp higher in December 2021. From the previous point of reference into April 2022, Tyson strongly outperformed the S&P 500. Essentially, equity markets overall were in serious decline as Russia invaded Ukraine, at the same moment as energy/food commodity shortages were feared.

Final Thoughts

For bottom-fishing thinkers, Tyson is a blue chip with clear upside arguments. It's a defensive pick in the food industry, with a powerful dividend yield setup for long-term income investors. Margins will be down in the immediate future, but should recover nicely in 12-18 months. If you are willing to hold it for a number of years, I am confident you will be rewarded handsomely. More than likely, Tyson will outperform the U.S. stock market in general as overvaluations remain in the majority of U.S. stocks, especially if a recession in corporate profitability is next.

I rate Tyson a Buy, with a share price target range of $75 to $80 by the middle of 2024. Such a gain would support a total return of +25% to +35%. Not an incredible advance mind you, but if the S&P 500 is flat to lower over the same span, Tyson might be a truly productive idea to consider. An improved margin outlook and a simple 10-year average valuation setup gets you to this gain. Of course, much higher profitability on better-than-expected sales, and an above-average valuation could produce a share quote above $100 in 2024 (all-time highs). Such a scenario would deliver a total return of +65% or higher over 18-24 months.

What are the risks? For starters, Tyson Foods has a spotty trading/operating record during past recessions. The company's worst operating performance arguably occurred between 2007-10, the Great Recession period. Tyson experienced a number of growing pains in operations and stagnate sales during that span. So, a severe recession later in 2023 may hold back the share quote (although I worry other stocks in America could decline even faster in price and value). I do believe downside is rather limited in a continued bear market phase on Wall Street. I have downside projections to $50 in worst-case scenarios (-20% for a total return), absent an all-out stock market crash.

All told, I am projecting Tyson will perform materially better than the S&P 500 the rest of the year, no matter if we get a big rise or decline in stock quotes generally. Buying it on the cheap, with analyst sentiment in the cautious to bearish zone may be the winning strategy from here. In the end, I am taking a contrarian slant vs. conventional wisdom, and forecasting now is a great time to buy a stake, especially on any weakness under $60 a share.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.