A Better Investment Than Dean Foods?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dean Foods (NYSE: DF) has been a strong performer, appreciating by about 65% over the past three years. This company is also consistently making moves to improve its bottom line, which is likely to further push the stock. However, this isn’t a guarantee, and there might be better options available.

Fiscal responsibility

For a long time, Dean Foods and the phrase “highly leveraged” went hand-in-hand. However, management has made several moves to improve the company’s balance sheet.

Dean Foods recently spun off WhiteWave Foods, which will help with debt reduction and cash flow. This may also allow Dean Foods to return more capital to shareholders via dividends and share buybacks. Dean Foods also recently sold its Morningstar brand to Saputo (Canadian dairy processor) for $1.45 billion.

Some analysts argue that Dean Foods has either sold or spun off all its high-margin operations. But these deals have really helped with debt reduction making Dean Foods a leaner operator. No company wants to deal with high interest payments especially if there's a downturn. 

Innovation

Dean Foods has been relatively innovative through the years. One of its most recent successes has been TruMoo, which was ranked as the fourth most successful consumer packaged good in the U.S. by Information Resources in 2012.

After a successful pilot program in retailers and schools, it looked as though TruMoo had the potential to be a big hit. And it has been. TruMoo uses fresh white milk and pure cocoa. It only contains 18 grams of sugar with no high fructose corn syrup or artificial growth hormone.

TruMoo is already one of the largest milk brands in the U.S. based on sales and volume. It’s especially popular in the Northeast and Pacific regions.

Company culture

On the negative side, the company culture for Dean Foods appears to be poor. According to Glassdoor.com, employees have rated their employer a 2.6 of 5. Comparatively, ConAgra Foods (NYSE: CAG) employees have rated their employer a 3.5 of 5, and Tyson Foods (NYSE: TSN) employees have rated their employer a 3.2 of 5.

As far as employees at Dean Foods are concerned, they see massive cost-cutting measures being taken, and they fear that they could be next on the chopping block. Based on anonymous reviews, it seems to be a self-preservation culture. Additionally, several employees have reported not being optimistic about the company’s future potential.

What can’t be argued is that ConAgra Foods and Tyson Foods have stronger company cultures. While these three businesses differ from one another, many of the processes are the same.

Dean Foods vs. peers

Dean Foods owns popular brands, such as Land O' Lakes, Country Fresh, Oak Farms, Tuscan, McArthur, Mayfield, Garelick Farms, and more. However, this list hasn't helped to generate consistent top-line growth. 

As Dean Foods deals with revenue problems, ConAgra Foods and Tyson Foods continue to improve their top-lines. However, only ConAgra has delivered steady annual earnings. In fact, ConAgra is consistently profitable, even during difficult economic times.

ConAgra also recently purchased Ralcorp, which gives it a much broader reach. Ralcorp came with a hefty price tag of $6.8 billion, but it should prove to be a worthwhile investment over the long run. ConAgra now adds breakfast cereal, cookies, crackers, chocolate, snack foods, mayonnaise, pasta and peanut butter to its brand portfolio of ACT II, Banquet, Chef Boyardee, Healthy Choice, Hebrew National, Hunts, PAM, Slim Jim, Swiss Miss, and more. 

The most important point is wouldn’t you feel more comfortable investing in a company that’s growing, as opposed to one that’s just looking to cut costs to improve its bottom line? The returns might be similar, but it’s always best to go with the strongest underlying business when considering a long-term investment.

As far as Tyson Foods is concerned, it’s well diversified between chicken, beef, and pork, owning market shares of 22%, 21%, and 17%, respectively. However, competition is fierce. The only way to gain market share is to increase marketing, but this will hurt margins, which are already unimpressive.

If you happen to be a dividend investor, then there’s no question that ConAgra Foods is the place to be. Not only does the dividend appear to be safe, but ConAgra is likely to be the most resilient stock thanks to its sheer size and broad product diversification. ConAgra is currently yielding 2.70%, Tyson Foods yields 0.70%, and Dean Foods doesn’t offer any yield at this time.

Conclusion

Why invest in Dean Foods when it doesn’t offer top-line growth and there are stronger businesses available? Tyson Foods is a well-managed company with strong diversification in its meat segments. 

With the acquisition of Ralcorp, ConAgra has gone from a great company to a dominant force. Fundamentals are strong, company culture is impressive, top-line growth is solid, and its dividend payments should remain intact. For me, ConAgra Foods is the stock to own.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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