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Smithfield Foods, Inc. (SFD), Tyson Foods, Inc. (TSN): Investing Carnivore Style

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In terms of per capita meat consumption the United States ranks second in the world, Americans consume meat at a rate over three times the global average. We are indeed a country that loves our meat.

In America, red meat has long been the most popular variety. But a myriad of health issues have been linked to the consumption of large amounts of red meat, colon cancer and cardiovascular disease to name two. While red meat still comprises the majority of the meat we consume, there has been a noticeable shift towards poultry.

First, a few facts about meat consumption trends in the United States. Annual consumption of pork has remained somewhat stable since the 1970’s. The record year for beef consumption in America was 1976. Since then, beef eating on a per capita basis has declined more than 30%. On the other hand, poultry consumption has experienced a pronounced rise. The rates at which we eat both chicken and turkey have more than doubled since 1970 (note this data is accurate as of 2007).

Smithfield Foods, Inc. (NYSE:SFD)

Meet the meat mongers

I’ve selected three companies as potential investments for the carnivore in each of us. First is Tyson Foods, Inc. (NYSE:TSN), the second largest meat processing company in the world, behind only JBS S.A. (a Brazilian company). Next up is Hillshire Brands Co (NYSE:HSH), formerly the Sara Lee Company. Last but not least is Smithfield Foods, Inc. (NYSE:SFD) the largest pork producer in the world.

Bigger doesn’t always mean better

Of these three companies Tyson Foods, Inc. (NYSE:TSN) is the largest in terms of meat production and market cap. After looking over a couple of their annual reports I wasn’t that impressed. Here’s why.

On a per share basis, Tyson has paid the same amount in dividends (16 cents) every single year since 2000. While its great it pays a dividend, stagnation is not something you want to see. Management finally decided to raise the dividend last November, but the yield is still only 0.8%.

The company has two types of common stock, class A and class B. There are 283 million shares of class A outstanding, controlled by 27,000 holders of record. There are 70 million shares of class B stock outstanding owned by just 9 holders of record. And yet when company issues are put to a shareholder vote, nearly 70% of the voting power belongs to the class B stock.

Normalized net income was ridiculously low in 2009. To be fair that’s almost certainly an aberration, considering the following year, Tyson Foods, Inc. (NYSE:TSN) realized normalized net income of $794 million. However normalized net income has declined in each year since.

Furthermore Tyson is dependent on one customer, Wal-Mart Stores, Inc. (NYSE:WMT), for over 10% of revenue. Wal-Mart Stores, Inc. (NYSE:WMT) comprised 13.8% of Tyson’s 2012 sales, up from 13.4% in 2010.

The one thing you should give Tyson Foods, Inc. (NYSE:TSN) credit for is that it has adapted to the shift from red meat to poultry. It has established subsidiaries all over the world, from China to Brazil to Mexico, for the purpose of poultry production.

Hillshire Farm, go meat

In June of 2012, the Sara Lee Company spun off its international tea and coffee operations. Immediately after the spin-off Sara Lee changed its name to Hillshire Brands. The Hillshire Brands Company owns several big name brands including Jimmy Dean sausage and BallPark hot dogs.  Amazingly, Hillshire Farms is even more dependent on Wal-Mart Stores, Inc. (NYSE:WMT) than Tyson, Wal-Mart Stores, Inc. (NYSE:WMT) accounted for approximately 25% of sales in 2012.

Hillshire reported that its pension plan was underfunded by $165 million as of 2012, compared with $118 million in 2011. Not at all a serious problem yet, but shareholders would be wise to keep an eye on it to make sure it doesn’t spiral out of control.

Normalized net income for the past four quarters combined is a negative $17 million. Equity has nearly doubled, mostly by way of reductions in accounts receivable, but at $422 million it’s still only roughly one-tenth of the market cap of Hillshire.  Those looking for positives will note that Hillshire has the highest margins, both gross and net profit, out of any of the three companies mentioned.

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