B&G Foods (BGS, Financial) is an interesting small-cap food company that generally flies under the radar, except for those investors that are seeking high dividend yields.
Founded in 1996 and based in New Jersey, B&G Foods and its subsidiaries manufacture, sell and distribute high-quality, branded shelf-stable and frozen foods across the United States, Canada and Puerto Rico.
The company has a diverse portfolio of more than 50 brands with some of them being iconic and historic brands. These food labels include Back to Nature, B&G, B&M, Bear Creek, Cream of Wheat, Crisco, Dash, Green Giant, Las Palmas, Le Sueur, Mama Mary’s, Maple Grove Farms, New York Style, Ortega, Polaner, Spice Islands and Victoria.
The company has been public since 2007 and currently pays a 6.9% dividend yield. However, problems lurk in the form of high leverage and an unsustainable payout ratio. Is this stock really the opportunity it appears to be at first glance?
Business model
The company’s traditional business model has been to acquire brands that have been neglected by the larger food companies such as General Mills (GIS, Financial) and J.M. Smucker (SJM, Financial). Then, B&G Foods re-energizes the brand and runs it through its own efficient sales, marketing and distribution operations.
B&G mainly sells to retailers. Its top 10 customers accounted for approximately 60.8% of net sales and approximately 59.8% of receivables for fiscal 2021. Walmart (WMT) alone accounted for approximately 27.7% of 2021 net sales.
The company usually generates strong free cash flow from these revitalized brands and pays out much of free cash flow to shareholders in terms of dividends. Historically, B&G Foods has made sensible capital allocation decisions by selling equity when the stock price is high and buying back shares when the stock price is low.
Balance sheet
The company has financed most of its acquisitions with debt over the years. B&G has a highly leveraged balance sheet with $2.27 billion in debt and only $33.7 million in cash. With only approximately $360 million in Ebitda expected in 2022, that is not sustainable.
However, earnings are depressed due to input cost inflation and the delay in pricing offsets. It is possible the company will be able to deal with these issues better in the coming year.
Recent earnings
The company's most recent earnings were for the fourth quarter and full year of 2021.
Net sales increased 4.5% in full fiscal 2021. However, organic sales declined 8.3% due to difficult comps against 2020, which experienced high at-home food demand due to Covid-19.
The gross margin was 22.9% in 2021 compared to 24.7% in 2020. Gross margins were negatively impacted by industry-wide input cost inflation, partially offset by company cost savings initiatives and price increases, which generally lag behind rising input costs.
Adjusted Ebitda was $358.0 million, a decrease of $3.2 million, or 0.9%, compared to $361.2 million for fiscal 2020. The decrease in adjusted Ebitda was primarily attributable to difficult comparisons against the extraordinary demand during fiscal 2020, as well as cost inflation and supply chain disruptions.
Valuation
During the latest earnings release, the company’s CEO stated:
“While we expect continued inflationary pressure and supply chain constraints in fiscal 2022, the overall supply chain is recovering from the Omicron surge, and we have implemented pricing actions to recover higher costs. Demand remains elevated as consumers continue to cook and bake more at home relative to pre-pandemic levels, and fiscal year 2022 is off to a good start.”
Company guidance for 2022 calls for net sales in the range of $2.07 billion $2.125 billion, Ebitda in the range of $358 million to $368 million and adjusted earnings per share in the range of $1.70 to $1.85.
Consensus analyst estimates call for EPS of $1.79 in 2022 and $1.94 in 2023, which means B&G Foods stock is trading at a forward price-earnings ratio of 15 for 2022 and 14 for 2023.
With an annual dividend of $1.90, the company’s EPS is not covering its dividend and the payout ratio is estimated at 106% this year. Safe dividend payout ratios are generally below 50%. However, the company’s payout ratio has been elevated throughout much of its history. The current dividend yield is 6.90%.
Guru trades
Gurus who have recently purchased shares of B&G Foods include John Hussman (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Gurus who have reduced their B&G Foods positions recently include Hotchkis & Wiley and Lee Ainslie (Trades, Portfolio).
Conclusion
Although B&G Foods appears to be fairly valued and has a high dividend, this situation might not be sustainable. The stock price has cycled from over $40.00 to a low of $13.00 over the past five years. Trading at the middle of that range currently, investors in the stock must count on dividends as their primary source of returns.
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