B&G Foods

This Beaten Down Small Cap Offers A 10% Yield With Improving Prospects

Investors love dividend stocks for the obvious reason of being able to draw a regular income. Small-cap dividend-paying stocks provide a great opportunity for investors to pursue growth opportunities while receiving a paycheck for holding on to the shares of a growing company in hopes of realizing a significant capital gain. This company pays regular dividends, has a market capitalization of just above a billion dollars, and fits the description above. However, investors are not pulling the trigger and waiting on the sidelines for a better investment opportunity, seemingly anticipating a dividend cut.

Q2 hedge fund letters, conference, scoops etc

B&G Foods

B&G Foods (BGS) has declined 33% in the year-to-date (YTD) period

B&G Foods

(Source – Morningstar)

I doubt the anticipated dividend cut will come anytime soon. On the contrary, I have taken a liking to the risk-reward profile of BGS at present and will probably buy some shares within the next couple of days.

Company overview & business strategy

Each of my analyses starts with a brief introduction of the company that I cover as this would help an investor who is not familiar with the company under coverage, gauge a measure of the business operations.

B&G Foods is a packaged food manufacturer with over 50 brands under its umbrella, distributing products through multiple channels including supermarkets, wholesalers, mass merchants, warehouse clubs, and foodservice distributors.

There are a few business strategies of the company. First, the company management is focused on building a sustainable business for the long-term by pricing products to offset inflation. Next, there is an increased emphasis on improving profit margins by implementing cost-saving initiatives. The target is to save $50 million from the cost of goods sold over a 2 to 3-year time frame. Finally, B&G Foods is looking for inorganic growth opportunities. Historically, the company has relied on acquisitions to fuel growth, which will remain a feature of B&G in the future as well.

Is B&G struggling?

The topline has not grown over the last couple of years, operating income has declined along with net earnings in the same period, but the dividends have been steady and stable. Yes, the company is struggling at the moment. Not to make ends meet, but to grow.

B&G topline has lost some momentum in the last couple of years

B&G Foods

(Source – Author prepared based on data from company filings)

To address this no-growth problem, the company management has come up with a few initiatives and some of these initiatives have already started delivering the goods.

Cost savings and pricing strategies will drive margins

Cost-saving is a primary business strategy of the company and there has been solid progress so far in achieving the target of $50 million in savings from the cost of goods sold. For the 3 months ended June 30, 2018, B&G reported revenues of $388 million. In comparison, net sales for the 3 months ended June 30, 2019 came in at $371 million. Despite the revenue miss, which can be attributed to the divestiture of Pirate Brands, gross profit grew from $81 million to $91 million in Q2 2019. This was a result of the 9% reduction in cost of goods sold.

Gross profit margin has been trending downward for a number of years, but the successful implementation of cost-saving initiatives will form the backdrop for B&G to buck the trend in fiscal 2019 or by 2020.

B&G Foods

(Source – Author prepared based on data from company filings)

It’s important to note the impact of the newly implemented pricing strategy as well. Leaving out the impact of Pirate Brand’s divestiture, the reported revenue of $371 million in Q2 represents an increase of 2.2% over Q2 2018 figures. The pricing strategy of B&G resulted in $4 million of benefits to the company, and the management is focused on continuing with their pricing strategy to generate revenues that negate the impact of inflation on all fronts.

It’s still early days but both the pricing strategy and cost-saving initiatives are promising and have secured some early success. The continued expansion of profit margins will depend on the ability of the management to execute these plans effectively.

Accretive acquisitions

This is an area of focus for B&G and it has remained so historically. The acquisition of Clabber Girl in May 2019 and McCann in July 2018 boosted the top line by $10.6 million in Q2. These acquisitions are value accretive and are already contributing to the earnings of B&G. As I pointed out earlier, B&G was failing to grow over the last couple of years. However, these value accretive acquisitions in combination with improving profit margins will once again trigger a growth phase for the company, in my opinion.

How about the dividends?

Dividends are literally the only reason why investors keep coming back to BGS to spot an investment opportunity. BGS yields 9.8% at the current market price of $19.30, which would have been a dream come true for income investors had it not been for the deteriorating fundamentals. Dividend per share has grown close to 9% over the last 5 years, and the company has distributed dividends in 60 consecutive quarters since its IPO in 2004. There’s nothing else an investor would want to confirm the management’s commitment to distribute wealth to shareholders.

The question is not about the dividends though, it’s about the safety and sustainability of dividends. The best place to start is by looking at the free cash flow coverage for dividends.

B&G Foods

(Source – Author prepared based on data from company filings)

B&G’s track record of covering the dividend distributions with free cash flow is promising. However, over the last 3 years, there have been times when the company has not been able to do so. The expected profit margin expansion is a good sign for free cash flows, which would in return secure the ability of B&G to maintain or grow its dividend distributions.

The current dividend payout ratio of 70% is an improvement from the previous years. The 5-year average dividend payout ratio is 106%, which might have been a factor that pushed dividend investors to the sidelines.

Against all the odds, I believe B&G will be able to maintain its current level of dividend, supported by the latest developments that I discussed above, which is a win for an investor even if dividend per share does not grow. As it turns out constantly, the best time to invest in a stock is when it’s least promising, at least as per the view of the majority of market participants.

Takeaway – The beating is too much

I would not have considered digging deep into B&G, had it not been for the recent beating of shares. There were negative developments on the horizon. From one end, there was the fear of contracting margins and flat revenues, and on the other end, the escalating trade war established fear of increasing costs of inputs. The result of the combination of these negative developments was BGS getting beaten more than it should have.

At today’s market price of $19.45, BGS is trading at a trailing P/E of just over 7 and a forward P/E of close to 11. It’s interesting to look at the historical P/E multiples. In 2018, the stock was trading at a trailing P/E of over 10 and a forward P/E of 14, but in all honesty, the outlook for BGS in 2018 was much gloomy than the outlook for BGS in 2019 and beyond. The company is addressing the right questions including the margin contraction and no growth in revenues, and the results are exciting. With a dividend yield of close to 10% and an improving outlook, shares deserve to trade at much higher earnings multiples than it did in 2018.

The dividend yield has never been this high either. In July, the dividend yield hovered over 10% momentarily and since then, the stock has recovered a bit. With a yield close to 10% and an opportunity in the horizon for B&G to restart its growth journey, I find BGS attractively priced.

Historical dividend yield

B&G Foods

(Source – Seeking Alpha)

I like the way how BGS is positioned at present. Not every investor is bullish on the stock. In fact, many are bearish of future prospects. There’s a notable short interest as well. From a technical perspective, a couple of good quarters and an uptick in the share price will force short sellers to cover their position, which in return would help the stock price climb even higher with the added demand. In any case, BGS is not the most attractive dividend and growth play in the markets today, but I like the risk-reward profile of BGS at present.


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