No. of Recommendations: 4
Author: griffkat | Date: 8/15/05 3:24 PM | Number: 1893
I have CAG as a long term holding in my dividend growth portfolio. My
interest in the stocks of companies in this portfolio is the security
of the dividend and annual increases in that dividend each year going
forward. I've diversified among at least 5 industries, with no more
than 2 stocks in an industry. My holdings include: CAG, JNJ, PG, BAC,

I've been concerned about the 2004 results for CAG where they were not
able to fund their dividend from free cash flow (FCF). I've reviewed
their 10K filed this week and it appears that they did not fund 2005
from FCF this year either. I've done some back of the envelope
calcuations to see what I thought would happen in FY 2006 and I'm still
concerned. I've listened to the conf call and CAG was confident they
would pay the dividend. Based on the numbers below, how would they do
that? Cash is down to $207.6M in fiscal '05.

Would appreciate any comments or thoughts on the numbers below. Am I
missing something? Maybe the Pilgrims Pride sale isn't in '06 EPS
estimates? Is it time to find a replacement for CAG in my portfolio?

Cash Flow statement recap:

2004 2005 2006 Projection
Net Income from continuing ops: $714.0 $663.1 $725.2(1)
Depreciation: 345.4 350.9 350.0(2)
Pilgrims Pride gain -- (185.7) (218.9)(3)
Other (incl pension) 66.3 117.3 75.0 (4)
everything else: (420.2) (108.4) (50.0) (5)
------- ------- ----------
Net Cash flow from continuing ops: $705.5 $837.2 $881.3

Property Plant & Equip: -348.6 -453.4 -400.0 (6)

Free Cash Flow: $356.9 $383.8 $481.3

Dividends: $536.7 $550.3 $569.8 (7)

(1) $1.40 per share estimate x 518M shares
(2) swag
(3) used same % net from '05 sale on $333M proceeds in '06
(4) I can't find what this actual is in the 10K, so I swagged $75M to
be conservative. Their pension underfunded if I read it right.
(5) An optimistic swag based on trend of all the other items:
inventory, AR, AAP, prepaids.
(6) 10K states CAG expects $400M capex in 2006.
(7) assumes only $.01 annual div increase to keep record of consecutive
dividend increases intact $1.10 x 518M shrs

First of all, let me say that you have done a very good analysis. It really does make you wonder if they will meet their dividend.

However, my concern is for the long term health of CAG. Even if they do meet their dividend, the ratio of current dividend to earnings is about 0.9, meaning that 90% of current earnings are needed to pay the current dividend. This company cannot grow with this burden, so I see a long period of decline coming, until the dividend is finally cut drastically, or even suspended. Of course, the stock price will slowly decline for years before this actually happens (I notice a steady decline already since earlier this year). I see that they have an earnings estimate forecast for 2006 of $1.40 per share vs. $1.09 per share this year. How could this possibly be reasonable? I think you will soon begin to see reductions in the concensus future earnings estimates.

So, I would say it could be past the time when you should have already gotten another stock.

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