Today's column is a follow-up to Wednesday's, which focused on Ben Graham's "Stock Selection Criteria for the Defensive Investor." This rather stringent screen, which is based on one developed by the father of value investing, has produced few candidates over the past year. Results of those identified late in 2015 and early in 2016 have been solid results, but the latest crop, from March has struggled.
Running the screen over the weekend revealed four names, three of which -- Dillard's ( (DDS) ), Cooper Tire & Rubber ( (CTB) ) and Waddell & Reed Financial ( (WDR) ), are the holdovers from March. The new kid on the block is the United States' largest egg producer and distributor Cal-Maine Foods ( (CALM) ). Last year the company sold 1053.6 million dozen eggs (as stated by the company; by my math that's more than 12.6 billion eggs), or about 23% of total U.S. consumption. Shares have fallen about 30% since last October, and about 10% this year, primarily on the back of falling egg prices.
You may have noticed skyrocketing egg prices at the supermarket last year -- as I did. This was the result of a decline in the hen population due to the Avian flu, which ravaged the hen population in the north, as producers were forced to halt operations and kill affected hens. Cal-Maine operates primarily out of the south.
If you've purchased eggs more recently, you've noticed that prices have dropped dramatically, as the Avian crisis has passed. After seeing eggs sell for more than $2 a dozen last year, I've purchased them this year for as low as $0.89. That is what's weighing on CALM at this point: Last year's banner, $316 million, $6.54 earnings per share was an outlier.
That's why you have to take the current price-to-earnings ratio, which is less than 7, with a grain of salt. CALM currently trades for about 15x next year's consensus estimate. Still, the balance sheet is strong. The company is extremely liquid, with a current ratio (current assets divided by current liabilities) of 7.5. It ended its latest quarter with $390 million, or $8 per share, in cash and short-term investments -- and just $26 million in debt.
Calm has an interesting, and unique, dividend policy, and you therefore have to view the current dividend yield, which is over 4%, with some skepticism. The stated policy is that the company will only pay dividends following profitable quarters, at a rate of one third of quarterly income. During 2016, it paid out $2.175 in dividends during the first three quarters, combined, but given the company's fourth quarter loss, (of $0.01, much better than the $0.19 consensus loss) there was no dividend for the quarter.
This is just the second time this has happened; the last was in the first quarter of 2010. In order for CALM to resume the dividend, it must be profitable on a cumulative basis from the quarter that the last dividend was paid. This is where things could get interesting. The consensus for next quarter is for a loss of $0.22. The consensus is small, in this case, just four analysts, but shares may suffer further if they miss two consecutive dividends.
To end up on my screen, it seems that companies must have some fleas, as is true in this case.
