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

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.