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Tyson Foods(TSN-N)

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1 Dividend Growth Stock Down 35% to Buy Right Now

Motley Fool - Fri Aug 11, 2023

It's been tough going lately for Tyson Foods(NYSE: TSN). Over the past year, its shares have declined over 35% -- and are off a painful 45% from their highs in 2022. The business is under a great deal of strain right now and investors are reacting as you might expect. However, chicken, beef, and pork are all cyclical businesses, and Tyson has successfully navigated downturns before.

Things are pretty bad right now

During Tyson's second-quarter conference call for its fiscal 2023, CEO Donnie King stated that he couldn't "remember a time when our business faced the highly unusual situation that we're currently seeing." The oddity he referenced there was that the chicken, pork, and beef businesses that make up the vast majority of the food maker's revenue were all in the dumps at the same time.

When the company held its third-quarter results call, which showed little improvement, King focused on the changes the company was making to deal with the ongoing headwinds. They notably included closing more meat plants in an effort to reduce costs. But he made sure to note, "We've been through market cycles before, and I'm confident that we have the right strategy, seasoned leadership, and team members in place to emerge stronger from this one."

That didn't do much to assuage investors, who pushed the stock sharply lower on the earnings news. It's hard to blame Wall Street for this one, given that adjusted earnings per share in the quarter were $0.15, down from $1.94 in the third quarter of fiscal 2022. One of the biggest headwinds right now is a sharply higher cost of sales, which is directly related to inflation's impact on things like animal feed. There's only so much Tyson can do about issues like this except to cut costs and wait for commodity prices to decline.

If history is any guide, though, things should eventually get better, and the actions the company is taking to reduce costs will be a net benefit, as the CEO suggested. Still, right now investors are running scared, and it kind of makes sense.

Some attractive numbers at Tyson

Before you join the stampede, however, you might want to consider some additional facts. The steep share price decline has pushed Tyson's dividend yield up to 3.4%. That is near the highest levels in the company's history. If you are a dividend investor, that should pique your interest at least a little.

TSN Dividend Yield Chart

TSN Dividend Yield data by YCharts

Now consider that over the past decade, Tyson Foods' dividend has grown by an incredible 800%. The dividend has trended generally higher over time, but it has not increased every single year. The dividend growth has basically come in fits and starts, and the current headwinds the company is facing will probably lead to a notable slowdown in dividend growth. But the business is cyclical, so the dividend behavior here isn't really shocking.

TSN Dividend Per Share (Annual) Chart

TSN Dividend Per Share (Annual) data by YCharts

The Tyson Limited Partnership owns 99.99% of the class B shares. This is basically an investment vehicle for the Tyson Family. It has a vested interest in the company continuing to pay out a generous dividend. In fact, a dividend cut would mean a pay cut for the Tyson family, which is probably not something the Tyson Limited Partnership would be happy to see.

Given the history and the interests of the Tyson family, it seems more likely that Tyson Foods just stops increasing the dividend until business starts to improve.

This too shall pass

Of course, the board could cut the dividend. But history suggests that it will hold the line and wait for the cyclical meat business to turn higher again, just like it has before. In the meantime, Tyson is trying to control the things it can (like costs), which is exactly what you would expect.

If you are a bit more aggressive, this could be a good time to buy a high-yielding stock with a strong history of dividend growth. Just go in knowing that you'll have to be comfortable with a material amount of uncertainty. But the risk/reward trade-off here could be well worth it given the historically high yield.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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