Summary
- B&G Foods' recent primary attraction has been an exceptionally high dividend yield.
- The company's operating challenges, however, and thin excess cash flow position has led to speculation that the dividend is at risk.
- The company's recent share repurchases should not be viewed as an indicator of strength or positive for the dividend as they reveal a contradiction in management's statements about priorities.
- Our projections indicate that the company's cash flows will barely support the dividend going forward and maybe at risk due to a variety of factors.
- B&G's shareholders may benefit more in the long term with a reduction in the dividend due to the heavily indebted company discount currently applied by the market.
B&G Foods (BGS) is a packaged foods company that distributes a wide variety of well known (and lesser known) brands regionally and nationally primarily through the grocery channel. The company's perhaps most recognizable brand is Green Giant although consumers would likely recognize many of its other core brands, including Clabber Girl, Cream of Wheat, and Ortega. Acquisitions have been a recurring theme for the company as it built its brand and product portfolio although this approach, in combination with a generous dividend, has left the company with a heavy debt load in a market that is increasingly skeptical of highly indebted companies. B&G's recent operating challenges have contributed to the depressed valuation due to weakening cash flows supporting the dividend.
Indeed, the company's dividend - currently yielding around 11% - has been one of the primary attractions for some time although the declining share price has overwhelmed the distributions. The yield is certainly appealing though simultaneously concerning since high yields tend to indicate potential distress. In combination with those who have questioned the sustainability of the dividend, there are also those who have argued that the company's repurchase of common shares is an indicator that the dividend is safe. In essence, this argument suggests that since management is willing to repurchase shares, it is therefore sufficiently confident in the company's financial condition with regard to the dividend to use cash on share repurchases.
We find this argument rather lacking not least due to the fact that there are a large number of companies with questionable managements who paid robust dividends and repurchased shares all the way do near-death experiences. Indeed, managements are not especially adept at predicting persistent declines in their businesses in part due to the optimism bias that is inherent in the market. It's the rare management indeed that, whatever the financial situation, states plainly that the business is going in the toilet and the dividend is at risk… at least until the business is already solidly there and even then it often takes far too long.
In addition, the repurchase of shares introduces a significant contradiction into management's statements which variously suggest the company is actively looking at acquisitions, committed to reducing its leverage ratio, sustaining the dividend, and repurchasing shares, all while generating very little excess free cash flow above the dividend payout. In essence, management has committed itself - almost entirely during the last earnings call - to four mutually exclusive objectives. It's unclear which takes precedence over the others.
Still, is B&G Food's business in the toilet? No, we're not quite there yet and may not get there. Instead, our current perspective is that shareholders are essentially caught between two unsavory possibilities both of which will likely depress share valuation in the near term - either the company defends the current dividend (at the cost of a high leverage ratio in a market that discounts highly indebted companies) or the company cuts the dividend (at the cost of a near term decline in the share price) to accelerate debt repayment. In our view, the later course of action would be preferable since it would provide a basis for longer term appreciation in the shares. In the meantime, though, prospective investors should be wary of either scenario given the likely impact on valuation.
In this article, we examine the dividend, the company's free cash flows, and factors largely beyond the company's control which could impact the company's ability to sustain the dividend. The overview is part of our broader ongoing assessment of the company.
