Conagra Brands Slashes Its 10% Dividend Yield in Half Just 1 Month After Getting Kicked Out of the S&P 500. Here's Why the Stock Isn't Tanking.

Conagra Brands (NYSE: CAG) reported fourth-quarter and full-year fiscal 2026 earnings on July 15. Newly appointed CEO John Brase, who took the helm on June 1, wasted no time announcing a 50% cut to the dividend, reducing the quarterly payout from $0.35 per share to $0.175, or $0.70 per year. The dividend cut will reduce Conagra's yield from 10% to 5%, which is still high-yield territory and significantly higher than the S&P 500's dividend yield of 1%.

With Conagra stock down more than 50% in the last two years and its market cap falling to $6.7 billion, Conagra was kicked out of the S&P 500 on June 29.

Despite the massive dividend cut, Conagra Brands fell just 0.4% on July 15. Here's why the dividend cut could signal the right move for long-term investors. Is the value stock a good buy now?

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The good and the bad from Conagra's results

Conagra reported a 2.9% decrease in net sales for fiscal 2026 and a 0.4% decline in organic net sales. The company is guiding for a 1% to 3% decline in fiscal 2027 organic net sales compared to fiscal 2026 as the industrywide slowdown drags on.

Conagra took a $2 billion goodwill and brand impairment charge in its latest quarter, which it attributed to a sustained decline in its share price and market capitalization. The impairment charge led to a hefty $3.37 in negative earnings per share (EPS). But excluding that charge, Conagra earned $0.47 in EPS and is guiding for adjusted fiscal 2027 EPS of $1.40 to $1.50 and adjusted operating margins of 10% to 10.5%.

While impairment charges affect the income statement and earnings, they don't affect cash inflows and outflows. In fact, Conagra raked in $979 million in free cash flow (FCF) in fiscal year 2026, which was less than the $1.3 billion from the prior fiscal year but was still enough to cover $670 million in dividends. With dividend expense cut in half and growth basically stalling, Conagra should have more cash to work with in fiscal 2027 to try to turn its business around.

Conagra exited fiscal 2026 with $7.1 billion in net debt, a 11.9% reduction from the prior year, but still a significant amount of debt for a company of its size. With more FCF to work with, Conagra should be able to reduce its leverage further in fiscal 2027.

A dividend cut was the right move

While no investor wants to see their quarterly dividend checks shrink, the trade-off is worth it if the underlying business improves. After all, a dividend is only as reliable as the company paying it. And if the dividend is soaking up much-needed cash or adding to the company's debt, it's unstable.

If you had invested $1,000 in Conagra stock 10 years ago, you'd have $554 today -- even when factoring in dividends. You can think of collecting high-yield dividends from a struggling company like plugging holes in a sinking ship. It would be far more useful to fix the underlying problem causing the ship to sink than to appease shareholders with a short-term solution like a high dividend.

However, the challenge with Conagra is that extra cash alone won't solve its problems. The company doesn't have an exciting new business idea with a good chance of generating a high return on capital. Rather, it has a portfolio anchored in frozen foods, snacks, treats, and processed foods.

Conagra has made a concerted effort to fine-tune its healthier brands by reducing its product count, removing artificial colors, and offering more nutritious versions of some products. But there's no denying Conagra is operating in the most challenging part of the food industry -- which is North American processed foods.

For context, PepsiCo (NASDAQ: PEP) is hovering around a multiyear low because its North American snack business (PepsiCo owns Frito-Lay) is dragging down what has otherwise been a solid performance from its North American beverage portfolio and excellent international results. Conagra doesn't benefit from diversification, as the vast majority of its sales come from North America.

Conagra is dirt cheap for good reasons

Even after its dividend cut, Conagra will still yield around 5%. Its FCF should be more than enough to cover its dividend. And the stock trades at just 9.7 times the midpoint of its adjusted earnings forecast. But Conagra has a lot of debt. And the company's pivot toward healthier options has yet to translate to meaningful results. So investors should consider the consumer staples stock only if they believe the company's portfolio of brands is strong enough to adapt to changing consumer preferences. If that happens, Conagra could look dirt cheap in hindsight. But a safer bet is to go with a stock like Pepsi that isn't solely dependent on the North American packaged food industry.

Like Conagra, Pepsi's valuation has compressed down to multiyear lows. Pepsi trades at just 15.8 times forward earnings, has a solid balance sheet, yields 4.4%, and has 54 consecutive years of increasing its dividend -- making it a Dividend King (a company that has raised its dividend for 50 or more consecutive years).

So while investors could reach all the way to the bottom of the bargain bin and scoop up shares of Conagra, a far less risky way to bet on a recovery in the North American packaged food industry is to go with Pepsi.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.