Consumer Products

Shareholder Attack of Smithfield Has Risks, but Merits Too (SFD, HRL, TSN)

Smithfield Foods Inc. (NYSE: SFD) is trading higher on word that a top shareholder called Continental Grain Co. has sent a letter urging the company to consider strategic alternatives. These alternatives include a breakup of the company into three units and including a dividend. We have just pondered whether there is the formation of an activist investor bubble happening, but either way this effort to drive Smithfield has some points that are very hard to ignore.

We cannot help but wonder if this strategy is a bit aggressive for the company if executed in full. Continental Grain owns about 6% of Smithfield, but what is interesting is that the group recently has lightened up by selling a small portion of its stake. The activist letter states:

Since the current management took over on August 31st, 2006 and through March 1, 2013, Smithfield stock has declined by 26 percent while, including dividends, Tyson Foods Inc. (NYSE: TSN) stock returned +70 percent and Hormel Foods Corporation (NYSE: HRL) returned +131 percent — a shocking divergence in shareholder return among industry competitors. During this time, Smithfield has paid no cash dividends, while Tyson has cumulatively paid $429 million and Hormel has paid $728 million.

Despite the poor performance of Smithfield stock (last year alone it was down 11 percent while the S&P was up 16 percent), management has been extremely well compensated. The CEO has received $37 million in total compensation over the past two years.

While a breakup into three units would probably unlock value, it is important to realize that the market cap at a new 52-week high of $25.67 is only $3.57 billion. That may just unlock value to the point of irrelevance for each of the units. That being said, it is pretty unforgivable that Smithfield has not paid a dividend to its shareholders. If the company could take away that $37 million going forward, then it would have enough to pay a 1% dividend yield without dipping into other cash.

Here are the points of interest in a supplement to the SEC filing that outline Continental’s efforts.

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