Tyson Foods: A Good Place To Hide In A Volatile Market

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Tyson Foods Inc. (NYSE:TSN) is a long-standing, well-recognized business with strong pricing power and a sustainable dividend of 2%. While many stocks have been suffering significant losses year-to-date and the S&P500 is being down by more than 13%, TSN’s stock price has even increased in the same time period.

Data by YCharts

To understand what is behind the strong performance in the first quarter, let us take a look at the financial figures.

Financials

Tyson Foods Inc. has delivered strong Q1 2022 results, presenting an impressive increase of 140% in GAAP EPS and an increase of 48% in terms of adjusted EPS compared to the prior year. The firm has also reported a GAAP operating income, which has been up by 106% Y/Y and adjusted operating income, which has increased by 40% compared to the year before.

In Q1 2022, the net income of TSN has more than doubled in comparison with Q1 2021.

Financial results Q1 2022 vs Q1 2021 (Tyson Foods Inc.)

Important to recognise, what are the main drivers for the improved financial figures. To understand these, one has to highlight how the volumes of sales and prices have changed for the individual business segments in the last year.

Segment results of Tyson Foods Inc. (Tyson Foods Inc.)

Although the sales for the beef and prepared foods segments have declined compared to the year ago quarter, Tyson Food Inc. was successful to raise prices and achieve better financial results.

The decrease in both beef and prepared foods segments are not associated with lower demand or increasing competition. The cause of the decrease was related to supply chain constraints and a tight labor market. The increase in prices were mainly driven by the higher input costs.

In my opinion, in an inflationary environment, with rapidly rising input costs, it is crucial that a firm has sufficient pricing power to pass these cost increases over to the customers. Last year TSN has demonstrated that they are able to do so and even achieve a cumulative increase of 0.3% in volume across all segments. This makes Tyson Foods Inc. an excellent defensive choice in this environment.

On top of this, TSN also managed to significantly expand its adjusted operating margin to 11.1% in Q1 2022, in contrast with 9.5% in Q1 2021. This expansion was led by the beef and pork segments.

Adjusted segment results of Tyson Foods Inc. (Tyson Foods Inc.)

Tyson Foods Inc. in Q1 2022 also repurchased $348 million worth of shares, creating further value for its shareholders.

Is Tyson Foods Inc. a good buy at the current price?

Although TSN’s stock has not seen a decline as the S&P500 year-to-date, it still looks attractive at current price levels. TSN is trading at a price-to-earnings multiple of 10.01, which is 50% below the sector median of 20. Not only it is significantly below the sector median, but also below its own historic average P/E. The average P/E of Tyson Foods Inc. in the last ten years was 11.87.

P/E history of TSN (Macrotrends.com)

In my opinion, Tyson Foods Inc.’s stock is an attractive choice at the current price. The stock could be a great buy for someone looking for a defensive name with low volatility.

Not only the usual price ratios suggest that Tyson Foods Inc. could be a good buy, but also the firm’s long-term strategic initiatives.

Strategic Initiatives that make Tyson Foods Inc. attractive

By 2024, the firm aims to have more than $1 billion saved by productivity improvements, more than 30% of which is foreseen to be by the end of FY2022. There are three core areas that will contribute to the sustainability of the productivity savings:

1.) Automation: focusing on chicken deboning

2.) Digital solutions: implementation of demand sensing tools to improve supply chains

3.) Operational and functional excellence and agility: implementing plant productivity initiatives and a new procurement program

Furthermore, TSN is committed to remain a key player and a market leader in the packaged food industry. To do so, the firm is intending to improve its product portfolio and grow its capacity to accommodate a rising demand. Also, Tyson Foods remains determined to become more competitive in the chicken segment. Improvements in competitiveness include reaching a profit margin range of 5-7% by the second half of 2022 and increasing their hatching rates.

In my view, the firm’s focus on process optimisation and automation is a key to future success and growth. Their commitment to savings initiatives is of great value to shareholders.

Dividends

For investors interested in dividends, it is important to show that TSN has consistently increased its payouts in the last decade. The 5 years growth rate of the dividend has been approximately 19.3%. Also, in my opinion, the currently paid quarterly dividend of $0.46 per share is sustainable, as the payout ratio is less than 20%.

Dividend history of TSN (Nasdaq.com)

In my view, Tyson Foods Inc. could also be a quality choice for dividend investors looking for dividend growth and dividend safety.

Share buybacks

TSN shareholder benefited not only from capital gains and dividends in the last five years, but also from share buybacks.

Annual number of share outstanding – TSN (Macrotrends.com)

Considering that TSN is trading below its historic average, while exhibiting strong financial performance, paying a dividend of 2% and even buying back shares, I believe it is an attractive entry point to start a position or to add to existing ones.

Risks

Industry specific risks

If we consider investing in the “packaged foods and meats” industry as a defensive play, we need to take a look at industry specific risks first. These risks do not only impact individual businesses, but may have far reaching consequences across the entire industry.

1. Fluctuations in commodity prices and availability of raw materials

I believe, this is one of the most serious risks to keep in mind at the moment. The current geopolitical situation and the tension in Eastern Europe has significant impact both on prices and availability. Tyson Foods may be well positioned to tackle this challenge as they seem to have strong pricing power.

2. Competition within the industry

The food industry is known for its high competition. For a firm to stay successful, product innovation, brand recognition and customer loyalty are key factors. As seen in the past, TSN seems to remain a well-recognized brand with a loyal customer base.

Other notable risks include, but are not limited to: diseases impacting livestock and other agricultural products, changes in consumer preferences and the reliance on regulatory approvals.

Risks specific to Tyson Foods Inc.

1.) Indebtedness

The firm highlights indebtedness as one of the financial risk factors. I believe TSN is well-positioned to control their debt as their Q1 leverage ratio of 1.1x is well below their target of 2.0x.

2.) Dependency on individual producers

Tyson Foods Inc. depends on individual farmers and producers to supply them with livestock. In my opinion, TSN as a market leader in the packaged food industry has both the reputation and the financial means to sustain the good relationship with its suppliers. However, risks associated with growing the livestock may be out of their control.

3.) Labor shortages

Since the Covid-19 pandemics labor shortages and high employee turnover have been experienced not only by TSN, but also by many other firms. I think the firm’s commitment to retain employees is strong. It offered a high number of vaccine booster events in the first quarter, it paid out $50 million in December only to frontline workers and invest continuously to account for transport and childcare needs. I expected the labor shortages to further represent a risk in the near-term, however in the long-term I believe TSN’s initiatives will resolve the issue.

Conclusion

Tyson Foods Inc.’s shareholders have been rewarded over the years by increasing dividends, capitals gains and share buyback programs. TSN has also demonstrated strong financial results with growing sales and improving margins. In my opinion, in the current inflationary environment, this combination makes this defensive stock a buy at the current stock price. However, expect that labor shortages will negatively impact TSN’s business in the short term.