Campbell Soup's decision to avoid repurchasing shares explodes its actions

In the face of things,Campbell Soup Companyit is(NYSE: CPB)financial results for the second quarter of 2020 were decent, if not upsetting. Adjusted earnings per share increased double-digit, while net soup sales in the United States rose 1%, signaling continued stabilization in the company's food and beverage segment.

However, these positive signs, combined with slightly improved prospects for the 2020 financial year, were enough to propel the stocks by nearly 9% in the afternoon's trading on Wednesday. Shareholders are undoubtedly showing increased confidence in Campbell's ability to increase profits in the coming quarters. Below, let's briefly review the past three months and examine why a crucial decision regarding share buybacks supported the company's potential for success.

Please note that all of the following comparative figures are presented compared to the quarter of the previous year.

Campbell & # 39; s second quarter: headlines

Data source: Campbell Soup Company. N / A = not applicable; data not comparable due to a large one-time gain in Q2 2020 (discussed below).

Key strengths

• Organic sales, which reflect the sale of the company's European chip business in the first quarter, increased by 1%.
• Net sales in the food and beverage segment remained stable compared to the comparable quarter at $ 2.4 billion. As mentioned, net soup sales in the United States increased by 1%; this increase was partially offset by lower sales of ready-to-serve soups.
• The snack segment experienced a 1% drop in sales to $ 1.9 billion; however, after adjusting for divestment of European crisps, organic sales increased 2% on the strength of Goldfish crackers, Pepperidge Farms cookies, and Kettle and Cape Cod crisps.
• The quarter included an after-tax gain of $ 1.02 billion on the sale of the Arnott & # 39; s Company cookies portfolio and certain other international businesses, which created the majority of the profit difference between the period current and previous periods.
• Adjusted gross margin increased by 150 basis points to 34.4%, which management mainly attributes to productivity improvements and cost reduction initiatives. Adjusted earnings per share (EPS) improved 11% to $ 0.72.
• Campbell increased his EPS outlook for 2020 by five cents, from a range of $ 2.50 to $ 2.55 to the slightly higher range of $ 2.55 to 2.56 $. The company is still expecting declared organic sales growth of between a loss and a gain of 1%, compared to the $ 8.1 billion in net sales recorded in fiscal 2019.

Image source: Getty Images.

Why Campbell Profits From a Tough Decision

In August 2018, Campbell announced that it would sell its underperforming Campbell Fresh and international businesses to boost the fortune of the organization. Since the start of the divestment process, the net proceeds from these sales have totaled approximately $ 3 billion.

It is not unusual, and often tempting, for multinational core consumer management teams to use funds from sales from commercial divisions to repurchase stocks in order to boost stock prices. The temptation must have been particularly strong for the Campbell management team, since the slowdown in sold activities had resulted in a cumulative loss of 13% in the share price during the last five years preceding August 2018.

Still, Campbell used his divestments to pay off his debt, which jumped from $ 6.2 billion to $ 9.6 billion when the company acquired snacking giant Snyder & # 39; s-Lance in March 2018. Good Of course, management indicated at the time that it would begin to divest for the express purpose of reducing the borrowings associated with the Snyder & # 39; s-Lance transaction. But the organization has been particularly disciplined in avoiding even using part of the funds for shareholder-friendly buyouts.

As a result, Campbell's long-term debt fell to $ 4.9 billion by the end of Q2 2020, with some help along the way from internally generated cash. Not only has this given the business a lot more financial flexibility, but it has also reduced the heavy burden of interest expense. In fact, the drop in interest expense for the rest of 2020 is a main factor behind the company's positive earnings outlook, which has been altered this quarter.

Given this illustration of fiscal discipline and the greater chances of growth following the sale of its weak divisions, it is not surprising that shareholders reacted so positively to Campbell's second quarter report. In fact, they approve of the company's more promising outlook for several consecutive quarters: in the past 12 months, Campbell's shares have appreciated 42%.