Hillshire Brands Will Deliver Higher Value

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Hillshire Brands , the meat and bakery business of the former Sara Lee, owns several iconic brands, including Hillshire Farm, Ball Park, and Jimmy Dean. After its first quarter 2014 earnings results, Zacks downgraded the company from a "neutral" to an "underperform" rating. DA Davidson also lowered their target price on Hillshire from $35 to only $25 per share. 

Despite the bearish attitude of Wall Street analysts, Hillshire Brands has been consistently trying to improve its operating performance. Let's take a look to see whether or not investors should be bearish or bullish about Hillshire Brands now.

Higher input costs lead to lower bottom line
In the first quarter of fiscal 2014, Hillshire Brands experienced only a 1% year-over-year increase in revenue to $984 million, while diluted earnings per share dropped by 42.5% from $0.40 last year to only $0.23 this year. The lower bottom line was mainly due to the higher cost of sales. Because of higher inflation, input costs were higher than anticipated, especially for pork and sows. After seeing higher costs, Hillshire Brands took pricing actions in its foodservice business during the quarter. Those pricing actions have helped the company deliver higher sales. 

Three things to drive Hillshire Brands' performance forward
What I like about Hillshire Brands is its ongoing performance initiatives. First, it laid out a plan to cut costs and make its supply chain and process more efficient. For the full year 2013, the company achieved $40 million in cost savings and is on track to deliver $145 million in cost reductions through fiscal 2016.

Second, the company relies heavily on innovation to drive its operating performance. It has a long-term goal of collecting 13%-15% of its annual revenue from new items launched in the prior three years. Hillshire Brands expects to have a big lineup of new product launches coming in the beginning of 2014.

Last but not least, the company intends to return more cash to shareholders via both dividends and share repurchases. The dividend is expected to increase by 40% in fiscal 2014. Moreover, Hillshire Brands plans to repurchase around $200 million of its own shares by 2015. It spent around $10 million on share buybacks in its recent quarter under this plan. 

Hormel Foods and Tyson Foods deliver lower yield
Hormel Foods and Tyson Foods have also returned cash to shareholders via both dividends and share repurchases. In the third quarter of fiscal 2013, Hormel Foods spent around $38 million to repurchase 953,000 shares and it still has around 10 million shares remaining from its existing buyback authorization. 

Tyson Foods repurchased around 4 million shares for $100 million in the third quarter. Since May 2011, Tyson Foods has returned $650 million to shareholders by buying back 33.4 million shares on the market.

 Income investors might like Hillshire Brands the most with its 2.20% dividend yield. Hormel Foods ranks second with around a 1.60% dividend yield. The dividend yield of Tyson Foods is the lowest here at only 0.70%.

My Foolish take
Hillshire Brands can continue to improve its profitability over the next several years with its $145 million cost savings initiative. Along with the better margin and bottom line, shareholders can expect to receive more cash via increasing dividends and share buybacks in the future.

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The article Hillshire Brands Will Deliver Higher Value originally appeared on Fool.com.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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