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Author: griffkat Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8893  
Subject: CAG Enough FCF to pay '06 Dividend? Date: 8/15/2005 3:24 PM
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(Note: I also posted this under the CAG discussion folder)

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,
C, WRI, UST, MO, SO, XOM.

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


Thanks in advance,

Griffkat

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1894 of 8893
Subject: Re: CAG Enough FCF to pay '06 Dividend? Date: 8/15/2005 8:00 PM
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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,
C, WRI, UST, MO, SO, XOM.

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.

Russ

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Author: griffkat Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1912 of 8893
Subject: Re: CAG Enough FCF to pay '06 Dividend? Date: 8/17/2005 2:07 PM
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Based on Russ's comments, I decided to review the likelihood of $1.40 in EPS in '06.


These comments were reported when 4Q earnings were released: "Looking
ahead, the company said 2006 earnings per share should rise above 2005
results, excluding items, but earnings in the first quarter of 2006
are likely to fall below year-ago results of 28 cents per share. Any
profit growth for fiscal 2006 is expected to be more likely in the 
second half of the year, ConAgra said."

EPS estimates:
     2005    2006 proj
1Q  $0.26    $0.23 (current estimate)
2Q  $0.47    $0.50 (asuumed 1H06=1H05 based on comments)
3Q  $0.32    $0.34 (7% growth)
4Q  $0.19    $0.33? (this is what's needed to hit $1.40 estimate)
  --------  -------
    $1.24    $1.40

I've analyzed and projected their income statement forward into 2006 
and in the end, it seems to me that it all comes down to their Cost 
Goods Sold.  Their gross margin was 22.8% in '04, 21.3% in '05.  This
alone made over a $200M difference in net income.  Decline in margin
was due to execution, promotion issues, etc...

I don't want to sell CAG if the long term prospects are good, dividend
stays intact and continues to increase.  They seem to be doing the 
right things: paying down debt, buying back shares.

Is it time to sell or buy more?

Griffkat



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Author: yielderA Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1916 of 8893
Subject: Re: CAG Enough FCF to pay '06 Dividend? Date: 8/18/2005 11:04 PM
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So, I would say it could be past the time when you should have already gotten another stock.

Possibly. Looking at the numbers the pivotal year seems to be 2001. Debt exploded and then exploded again in 2002. From that point on CF/share, ROA and ROC declined. I think this was the International Home Foods acquisition. Since then there's been a great deal of divestiture. It looks like a company in transition. It seems that it's exiting exiting commodity-related businesses and focusing on branded and value-added food products. FWIW, 4 years of decline doesn't sound like very good execution ;-) I'd go back over the annual reports to see what management has to say. If they don't talk about the problems or down play them or are constantly turning the corner, I'd head for the door until they showed me results.

Mike

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