CONAGRA FOODS INC. $34 (New York symbol CAG; Income Portfolio, Consumer sector; Shares outstanding: 424.5 million; Market cap: $14.4 billion; Price-to-sales ratio: 0.8; Dividend yield: 2.9%; TSINetwork Rating: Above Average; www.conagra foods.com) makes a wide variety of packaged foods, including Chef Boyardee canned pasta, Hunt’s tomato sauce, Peter Pan peanut butter, Orville Redenbacher popcorn and Reddiwip whipped cream. Consumers account for 70% of ConAgra’s sales. Businesses, like restaurants and other food makers, provide the remaining 30%.

Sales rose 9.8%, from $12.1 billion in 2010 to $13.3 billion in 2012 (fiscal years end May 31).

Ralcorp acquisition boosted results

In January 2013, ConAgra paid $4.75 billion for Ralcorp Holdings, the largest maker of private label food in the U.S. The purchase lifted ConAgra’s sales to $15.5 billion in 2013 and to $17.7 billion in 2014. Private label foods now supply 26% of ConAgra’s total sales.

Earnings fell 2.3%, from $778.6 million in 2010 to $760.4 million in 2011. However, the company’s share buybacks increased its earnings per share by 0.6%, from $1.74 to $1.75. Earnings then rose to $1.84 a share (or a total of $769.0 million) in 2012. Thanks to Ralcorp, earnings improved to $2.17 a share (or $922.8 million) in 2014.

The Ralcorp purchase has not gone as smoothly as ConAgra planned. That’s partly because sales of packaged foods, both name brands and private labels, have declined as increasingly health-conscious consumers switch to fresh meat and vegetables.

In response, ConAgra is launching new, healthier foods. It devoted $103.5 million (or 0.6% of its sales) to product development in 2014, up 11.2% from $93.1 million (or 0.6% of sales) in 2013. The company is also adjusting its pricing and marketing strategies to further increase its sales.

Major savings on the way

Meanwhile, ConAgra continues to make good progress cutting Ralcorp’s costs, including closing plants and shifting their production to other facilities. These moves should save it $300 million a year by fiscal 2017, giving it more room to lower its prices and fend off competitors.

The company recently merged its flour-milling operations into a new joint venture called Ardent Mills. ConAgra and privately held Cargill each own 44% of this new business, while CHS Inc. (Nasdaq symbol CHSCP) holds the remaining 12%.

ConAgra used the cash from the Ardent Mills deal to lower its debt by $500 million. As of August 24, 2014, its long-term debt was $7.9 billion, or a somewhat high 55% of its market cap. However, savings from integrating Ralcorp should let the company meet its goal of cutting its debt by a further $500 million by the end of fiscal 2015.

Dividend still safe

To conserve cash, ConAgra has stopped buying back shares. However, it plans to keep paying its $1.00-a-share dividend, which yields 2.9%. Its fiscal 2015 earnings will likely rise to $2.28 a share, and the stock trades at a reasonable 14.9 times that estimate.

ConAgra is a buy.