Green Eggs and Spam
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What do you think of when you think of an egg? Breakfast time? Green eggs and ham? The number of pleats on a chef’s hat (100) which signifies how many ways the chef should know how to cook eggs? Or an egg a week, a luxury beyond compare, promised to young Frank McCourt, as he recounted in the Pulitzer Prize winning autobiography, ‘Angela’s Ashes?’ Out of all the miserable details of his poverty stricken childhood in Ireland, this one touched me the most. Such a simple thing, an egg.
This led me to thinking about Cal-Maine Foods, Inc (NASDAQ: CALM) with its 5.00% yield and 11.04 P/E. This egg producer has a variable payout based on 33.36% of net income. The dividend can fluctuate or even be halted; it all depends on the income. For investors dependent on a predictable dividend income stream, this is not for you. But as a defensive consumer staple play with a higher yield this is intriguing.
With prices of beef, pork and lamb soaring, Cal-Maine’s eggs are still a bargain protein, less than twenty cents per egg on average. Compare that with an equivalent amount of red meat protein, which will cost several dollars per pound. A dozen eggs costs the same as only 8 oz. of the lowest priced beef cuts. As healthier eating habits have also been trending in the US, people have been backing off red meat not just due to cost but also fat and cholesterol concerns.
Like all the food stocks Cal-Maine is vulnerable to higher corn prices due to the drought. Eggs, though, are one of the few foods that have some pricing power as people can hardly bake or cook without eggs. They're as basic as milk and bread. Cal-Maine has some other interesting positives like 412.40% earnings growth year over year. Insiders hold 36% of shares and institutions hold 97% of the float. Cal-Maine will be reporting again on September 24.
Green Eggs and Spam?
Is Spam the inspiration for a musical, annoying email or a delicacy for Hawaiians? Spam is spiced ham made by Hormel Foods Corp (NYSE: HRL) since 1937. In the August 23 quarterly report Hormel CEO Jeffrey M. Ettinger mentioned Spam was mostly responsible for raising operating profit 32% on strong sales in the Grocery Products segment, and the All Other segment (mostly Hormel Foods International) raised operating profit by 55% on very strong export sales of Spam. Their three other operating segments, Jennie-O Turkey Store, Refrigerated Foods and Specialty Foods did not perform nearly as well as the Spam lines although operating profits rose in each segment. Spam helped raise diluted EPS up 14% from .36 in Q3 2011 to .41 in Q3 2012.
Who knew Spam was so popular? The insiders do, holding almost half of shares outstanding. Hormel also has a 2.10% yield and has been paying dividends for 336 consecutive quarters. The P/E is 16.10 and the return on assets is 10.45%.
While Hormel makes many cured and canned meat products besides Spam like chili, corned beef hash, bacon, dried beef, etc. I think the consumer trend is toward fresher and healthier food, and Hormel is not a big beneficiary of this trend, the Jennie-O Turkey segment aside. Even Campbell’s Soup Company is acknowledging the healthy fresh trend with its recent acquisition of Bolthouse Farms, offering fresh carrots, refrigerated salad dressings and healthy juice drinks. Analysts also believe Hormel will continue to face stiff competition from Conagra and Kraft Foods.
Look in Your Fridge
There’s probably a Kraft product in your kitchen right now. Kraft owns iconic names like Tang, the breakfast drink of the astronauts, Nabisco, Philadelphia, Kraft cheeses, Velveeta and many more. On October 1, Kraft Foods Inc (NASDAQ: KRFT) will split into Kraft Foods Group (comprising the grocery brands and trading as KRFT) and Mondelez International (holding the international snacks and candy brands and trading as MDLZ). Kraft was just dropped on September 14 from the Dow 30 because of the upcoming split.
Right now Kraft has a 2.90% yield and a 19.86 P/E but with the split everything will be unstable until at least the first earnings reports from both. With a company undergoing a major transition and facing currency and international economic concerns, it may be wise to stay on the sidelines. Buffett has lightened his Kraft holdings by 33%.
A Buffett Fave
Instead you might want to have some Minute Maid orange juice with your green eggs and ham. Minute Maid is only one of many beverages available from Buffett favorite The Coca-Cola Co (NYSE: KO). He drinks it, he owns it, he loves it. Coca-Cola also has healthy offerings like juices and waters. It has a 2.70% yield and a 20.18 P/E.
Or maybe you are a Pepsi drinker instead. Pepsico Inc. (NYSE: PEP) also owns Quaker products including breakfast bars, Quaker oatmeal and cereals including Life, the cereal that Mikey likes. Pepsico has all the sodas, juices and waters like competitor Coca-Cola. Pepsi, however, also has all the ‘itos,’ Dorito, Cheeto, Tostito and Judge Ito (just seeing if you were paying attention). Pepsi and Coca-Cola are both considered defensive plays. Pepsico has a slightly higher yield of 3.10% and a slightly lower P/E of 18.53. Its regular dividend increases for more than 25 years have also earned Pepsi the title of “Dividend Aristocrat.”
What’s Best for Breakfast
How many times have you heard it’s the most important meal of the day? Breakfast stocks can make or break that portfolio. Hormel, in my opinion, is too dependent on Spam to power their earnings, but it’s a good dependable dividend payer. Kraft is too volatile right now before the split. Buffett may love his Coca-Cola but I think Pepsico is a better name for defense and yield. I think you can buy Cal-Maine Foods for growth and yield. Their tickers, CALM and PEP, are ironic as Cal-Maine is more of a growth name and Pepsico is a less volatile defensive name. None of these names are bad names by any means but some may be better suited to your taste than others.
Finally, listen to your mother and don't forget to eat a hearty breakfast before the market opens.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola 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.If you have questions about this post or the Fool’s blog network, click here for information.