Tuesday, October 5, 2010

The Joy Of Sara Lee

From its delicious cheesecakes to its baked goods, Sara Lee (SLE) has delicious offerings that can tempt even the most disciplined dieter. The company makes food, beverage, household goods, and body care products.

Sara lee has been a lousy investment for investors over the past few years. The stock has had negative growth for the past five years. Earnings have declined nearly 12% and revenue has dropped the last three years. The company’s CEO just resigned two months ago due to health problems. The good news is that things appear to finally be improving at Sara Lee.

The company has been trying to turn its operations around for years. Sara Lee underwent a restructuring in 2006. The company has refocused its operation around its food products. Sara Lee adopted a new slogan, “the joy of eating”. The company sold off many of its apparel and household goods brands. Sara Lee has engaged in a major cost cutting strategy, reducing expenses and jobs to improve the company’s bottom line. The plan is working.

Earnings have grown nearly 30% for the current year and the company is expected to earn $10.9 billion dollars this year. That would be the first time that the company has had positive revenue growth in years. Margins and operating profits have been rising over the past two years. Sara Lee is restructuring high interest debt and buying back shares. All of these moves will help provide value to shareholders.

Other firms are also taking notice of the positive moves at Sara Lee.The stock was even buoyed today by reports that the company may have a buyout offer. Reports stated that KKR Inc. made a $12 billion dollar offer for Sara Lee. That’s a 25% premium on its current market cap. Shares closed up 7% at $14.40.

Although the stock is trading for just $14 a share, Sara Lee’s shares still do not appear cheap. The stock currently trades at 15 times earnings. That’s a high valuation for a company that has struggled to grow earnings historically. The most attractive thing about Sara lee is the dividend. The stock is currently yielding 3.3%. This yield is actually below the historical yield of 3.8%. The current dividend payout rate is 60% which is high but will drop to 47% of earnings at the end of the year. The dividend is easily sustainable due to the company’s great balance sheet.

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