Starboard’s value is a big bet on this blue-chip dividend stock. Should you?

Activist hedge fund Starboard Value said it has bought a significant stake in food processing company Lamb Weston ( LW ) and is asking the company to cut costs by $500 million through fiscal 2028, Bloomberg reported. The French fries maker, which currently has a dividend yield of 3.4%, has already said it will cut costs by up to $250 million by 2028.

However, given Starboard’s mixed record in recent years, Lamb Weston’s very low growth and significant negative exposure to GLP-1 weight loss drugs, I don’t recommend that investors buy LW stock at this stage.

LW sells frozen potato products to supermarkets and restaurants, including fast food outlets. One of its key offerings is French fries.

In LW’s fiscal second quarter, its sales rose 1% to $1.62 billion from the same period last year, while its income from operations, excluding special items, fell 4% year over year to $182.8 million. Analysts on average predict that its earnings per share (EPS) will sink 17.6% during the current fiscal year, which ends in May. During the next fiscal year, the average estimate calls for a 12.3% increase in EPS. However, its top line is expected to decline by 1.4% during this year.

Lambweston has a forward price-to-earnings (P/E) ratio of 16.1x and a market capitalization of $6 billion. As of the market close on March 10, shares have fallen 11.5% in the past month, and they have fallen 25% in the past three months.

Over the past three years, the hedge fund’s top 20 holdings generated an annualized return of just 2.86%, while its top 50 holdings generated an annualized return of 4.09% over the same period. And importantly, these weighted top-20 names consistently underperformed the S&P 500 Index ($SPX) from the second quarter to the final quarter of 2024.

Starboard’s core fund returned less than 5% in 2024, Bloomberg noted. Also in 2024, Starboard was unable to push its agenda through Autodesk ( ADSK ), News Corp ( NWS ) and Pfizer ( PFE ), the news service noted. Investors should note that Lamb Weston may reject Starboard’s views, at least for a while.

According to a survey published in December 2024, GLP-1 users spent less at fast food chains, while they spent less on “impulse shopping” at grocery stores. Since LW appears to derive a significant percentage of its revenue from fast-food chains, its financial results may have been hampered by the spread of weight-loss drugs, and the latter potential trend could be meaningfully forward.

Similarly, because French fries are generally considered unhealthy, GLP-1 drugs may significantly reduce the amount of French fries consumers buy in supermarkets, and this phenomenon may become more pronounced in the long term if GLP-1 drugs become more popular.

The company’s forward P/E ratio of 16.1x isn’t particularly attractive, given its status as a defensive stock, its lack of meaningful growth, and the ongoing threat it faces from GLP-1 drugs. Consequently, LW does not look attractive to investors at the moment.

As of the date of publication, Larry Ramer had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com