As far as defensive businesses go, Maple Leaf Foods (TSX:MFI) is as good as it gets. It’s Canada’s largest prepared meats and poultry producer, and it’s provided investors with a healthy dividend for many years. But even defensive stocks trading on the stock market get hit. Maple Leaf Foods is no exception.
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The business
Maple Leaf Foods has a long history of supplying prepared meats for the dinner table of Canadians. It’s a business that has served the company well for many decades and one that remains highly defensive. This, however, does not mean that there are no vulnerabilities.
The new post-pandemic environment has exposed many of these vulnerabilities. This left Maple Leaf Foods struggling with inflation, lower volumes, and declining profits and margins. In response, the company has had to work hard to innovate and drive new processes and efficiencies.
The company is facing a future of moderating inflation and improving pork market conditions. As things continue to normalize, the company expects continued momentum.
Today, investing in Maple Leaf stock provides investors with a dividend yield of 3.44%. There are many in the stock market that have higher yields, but this is the food business and, therefore, highly defensive. This is a very attractive characteristic of the stock.
Maple Leaf’s dividend history
Over the last 10 years, Maple Leaf stock’s dividend has been highly reliable as well as growing. The annual dividend of $0.16 in 2013 has increased to the current $0.84. This represents an increase of 425% or a compound annual growth rate of 18%. This is quite good for a defensive consumer staples company.
The problem lies in today’s predicament that the company finds itself in. As investors, we need to decide if the situation is temporary or a sign of structural problems. So, first of all, net income turned negative in 2022. This was largely a result of soaring inflation. In response, Maple Leaf had to increase prices, which is affecting volumes to this day.
Net debt continues to rise and currently stands at $1.8 billion. This means that Maple Leaf Foods is not covering its dividends. With an already highly leveraged balance sheet (debt to capital of 58%), how long can the company maintain its dividend?
Investing in Maple Leaf Foods stock for its dividend
Management is at work today, trying to reboot the business. New products, new plants, and cost cutting have been the focus as they attempt to stabilize the business. The good news is that Maple Leaf Food’s investments are paying off.
In the third quarter of 2023, the company saw sustained momentum. For example, in its meat protein business, it’s achieved three consecutive quarters of margin increases. The EBITDA margin came in at 11.4% in the quarter. This is up from 8.5% last year and approximately 9% last quarter. Also, EBITDA increased 68% compared to last year.
While market conditions have not fully normalized yet, the company is already seeing improvements, as it’s benefiting from reduced feed costs. Looking ahead, Maple Leaf Foods expects improved cash flows as it arrives at structurally lower capital expenditures. With this, management will work to de-lever the balance sheet and grow its dividend once again.
The bottom line
Investing in the consumer staples sector has its clear advantages, especially in difficult times such as today. Maple Leaf Foods will likely come out of this period of instability and carry on as a stable dividend payor trading on the TSX stock market with a steady, reliable business.
