One of the primary fundamental metrics I have learned to use over the years to filter through the tens of thousands of publicly traded companies in the stock market is to look for a history of dividend payout. Dividends are one of the simplest ways for a company’s management to express confidence in its long-term prospects, and to return value to its shareholders. Talking heads and a lot of analysts tend to focus on stock repurchases, but I think dividends are better, because they act as a passive income source that puts useful, periodic cash in shareholder’s accounts.
In the early stages of the pandemic, a lot of companies reduced or eliminated their dividend payouts altogether as a way to preserve cash to weather the difficult conditions imposed by COVID restrictions. While understandable, it also provided a simple method to filter through the market and identify the stocks that best fit my preferred investing method. The fact that a lot of stocks also dropped to or near historical lows during that time also helped, as valuations across the board improved.
Over the last several months, the market has been rallying to new all-time highs, with stocks in a variety of sectors and industries following that broad trend. That means that from a valuation perspective, a lot of stocks are very expensive. Some companies have begun reinstating dividends, which is increasing the pool of stocks to think about as useful candidates.
One recent example of a stock that just announced a resumption of dividend payments is Cal-Maine Foods, Inc. (CALM). This is a company in the defensively positioned Food Products industry of the Consumer Staples sector that has historically followed a variable dividend payout policy, based primarily on whether it achieves a positive Net income result in a given quarter. After the last quarter’s earnings announcement, management announced a $.034 per share dividend payout. This is also a company that last paid a dividend in the third quarter of 2019 – before the pandemic. The resumption of its dividend, albeit small is a positive mark for the company’s generally improving fundamental picture.
This is also a stock that has been diverging from the pattern of the broad market, and even many stocks in the Food Products industry for the last few months. After finding a 52-week high last August at around $47 per share, the stock has moved into a long-term downward trend that appears to have finally found a bottom at the end of May at around $34.50. The downward trend, coupled with improving fundamentals and a reinstated dividend could be a positive sign for value-oriented investors to think about using the stock as a useful income-generating tool. Let’s dive in.
Fundamental and Value Profile
Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company operates through the segment of production, grading, packaging, marketing and distribution of shell eggs. It offers shell eggs, including specialty and non-specialty eggs. It classifies cage free, organic and brown eggs as specialty products. It classifies all other shell eggs as non-specialty products. The Company markets its specialty shell eggs under the brands, including Egg-Land’s Best, Land O’ Lakes, Farmhouse and 4-Grain. The Company, through Egg-Land’s Best, Inc. (EB), produces, markets and distributes Egg-Land’s Best and Land O’ Lakes branded eggs. It markets cage-free eggs under its Farmhouse brand and distributes them throughout southeast and southwest regions of the United States. It markets organic, wholesome, cage-free, vegetarian and omega-3 eggs under its 4-Grain brand. It also produces, markets and distributes private label specialty shell eggs to customers. CALM has a current market cap of about $1.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings were flat, at exactly 0%, while revenues increased by 3.9%. In the last quarter, earnings increased by 12% while sales rose by 3.38%. The company’s margin profile has recovered from a negative pattern that predated the pandemic. Net Income as a percentage of Revenues in the last quarter was 3.77% versus 4.6% over the last twelve months. The drop in the quarterly number is a concern, as the company has little margin for error; industry indications that chicken feed costs are rising is a risk factor, which makes this an important measurement in quarters ahead.
Free Cash Flow: CALM’s free cash flow is very modest, at $26.16 million; however it also confirms a reversal of the negative profitability trend I just referred to. A year ago, this number was -$47.26 million. The current number translates to Free Cash Flow Yield of 1.46%.
Debt to Equity: CALM’s debt to equity is .0, which means that CALM has no long-term debt. Their balance sheet shows about $180.7 million in cash and liquid assets. CALM has plenty of liquidity, but its declining operating profile means that it is also burning cash; at the beginning of 2019, their balance sheet showed $341.85 million in cash.
Dividend: CALM’s most recent quarter included a dividend payout of $.034 per share. Their variable dividend payout policy means that it is difficult to predict whether this will continue on a quarterly, semiannual, or annual basis; however the fact that they have not paid any dividend at all for the last two years is a positive sign of fundamental strength.
Price/Book Ratio: CALM’s Book Value is $20.81, which marks an increase from $19.47 a year ago. That means that the stock’s Price/Book ratio is 1.75 versus their historical Price/Book ratio of 2.217, which suggests that the stock is undervalued by a little over 21% right now.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from August of 2020 to late May, and provides the reference for the Fibonacci retracement lines on the right side of the chart. The stock found trend support at around $34.50 in May and has rebounded from that point, approaching resistance at around $37.50 based on consolidation activity in April and May. A push above that resistance should see upside to around the 38.2% retracement line $39 and $40, while a pivot off of resistance should see the stock retest its 52-week low point at around $34.50.
Near-term Keys: The stock’s momentum is strongly bearish right now, but the stock’s fundamentals and value proposition make the stock an interesting candidate to consider as a long-term investment candidate. If you prefer to focus on short-term trading strategies, you could use a break above $37.50 as a good signal to buy the stock or work with call options with an eye on $40 as a quick-exit target point, while a drop below $37.50 could be a signal to think about shorting the stock or working with put options with an eye on $34.50 to close out a bearish trade.