High Dividend 50: B&G Foods

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High Dividend 50: B&G Foods


Published on March 16th, 2022, by Quinn Mohammed

High-yield stocks pay out dividends which are significantly in excess of market average dividends. For example, the S&P 500’s current yield is only 1.4%.

High-yield stocks can be very helpful to shore up income after retirement. A $120,000 investment in stocks with an average dividend yield of 5% creates an average of $500 a month in dividends.

We have created a spreadsheet of stocks (and closely related REITs and MLPs, etc.) with dividend yields of 5% or more…

You can download your free full list of all securities with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:

 

To start off our coverage of high-yield stocks, we will review the packaged and frozen foods company B&G Foods (BGS).

The stock offers a massive 7.4% dividend yield and after years of dividend increases, the company has only maintained the dividend following 2019. The payout ratio has become stretched, and the company will have to grow its earnings to get this ratio in check. The stock may be suitable for investors with an appetite for risk, and high yield.

Despite these headwinds, the valuation does not provide any margin of safety according to our estimates. The company may struggle to pay its dividend.

Business Overview

B&G Foods was created in the late 1990s, with the initial purpose of acquiring Bloch & Guggenheimer, who sold pickles, relish, and condiments. Bloch itself was founded in 1889. The common stock we know today under the ticker BGS has traded on the NYSE since 2007. B&G Foods has a market capitalization of $1.8 billion.

Some of the company’s well-known brands include Green Giant, Ortega, Cream of Wheat, Mrs. Dash, and Back to Nature, with over 50 brands in total. The company’s latest major acquisition was Crisco in early December 2020. The company’s product portfolio focuses on shelf-stable, frozen and snack brands.

Source: Annual Report 2020

The company operates in the United States, Canada, and Puerto Rico. While the company possesses some major brands, such as Green Giant, Ortega, and Crisco, many of their brands can be considered second tier.

On March 1st, 2022, B&G Foods reported Q4 and FY 2021 results for the period ending January 1st, 2022. In fiscal 2021, the company reported revenue of $2.06 billion, a 4.5% increase compared to 2020, primarily as a result of the Crisco acquisition but partially offset by one fewer reporting week in fiscal 2021. Adjusted net income equaled $123.7 million or $1.88 per share compared to $146.0 million or $2.26 per share in fiscal 2020.

B&G Foods provided its expectation of $2.07 billion to $2.13 billion in sales for fiscal 2022 and expects adjusted EPS to be between $1.70 and $1.85.

Growth Prospects

B&G Foods has spent the last decade acquiring food brands in debt-financed deals, followed by raising product prices and the business scale over time. The company’s 2020 results were positively impacted by the COVID-19 pandemic. However, in 2021 these positive impacts had already begun fading, and we anticipate further moderation in 2022.

We believe B&G Foods will generate around 3% earnings-per-share growth per year over the next five years. Revenue has continued growing, and the share count has remained relatively stable (up 2.5% per year over the last nine years). However, the company has taken on more debt to fund the Crisco acquisition, and the interest expense takes up a massive portion of operating income. According to the company’s latest report, long-term debt is now $2.3 billion.

While inflation and supply chain disruptions weigh on operations, the company has responded by increasing prices to recover higher costs. Since many of B&G’s brands can be considered second-tier, they may not have strong pricing power, and volumes may decline.

Competitive Advantages & Recession Performance

B&G Foods has no significant competitive advantages in our opinion. The company does not possess a strong moat, has second tier brands, and may not have the pricing power they expect given the ongoing inflationary challenges.

While the company may not have an advantage over peers, it’s still a defensive consumer staples company and generally delivers stable cash flow.

B&G Foods’ earnings-per-share throughout the Great Recession of 2007-2010 are listed below:

B&G Foods’ earnings-per-share declined significantly in 2008. However, the company went on to just about fully recover by 2009, and in 2010, the company had put the recession behind them. B&G’s earnings continued to grow once the recession ended. As a result of the EPS decline in 2008, the company cut the dividend by 20% in 2009.

The nature of the COVID-19 pandemic allowed for significant growth in 2020, but in another recession, B&G may perform as poorly as they did in the Great Recession. Therefore, we don’t consider B&G Foods to be a recession-resistant business.

Dividend Analysis

B&G Foods has paid an annual dividend of $1.90 since 2019. At the current share price, B&G has a very high yield of 7.4%.

According to the corporation’s leadership, B&G is anticipated to generate adjusted EPS between $1.70 and $1.85 in 2022. At the mid-point, a $1.78 EPS does not fully cover the $1.90 annual dividend they are expected to pay.

After the company’s 20% dividend cut in 2009, B&G raised the dividend for nine consecutive years into 2019. Following this, the company stopped increasing the dividend in 2020 and 2021.

B&G Foods’ dividend is not secure, with a projected dividend payout ratio of 107% for 2022. In fact, in the last decade, the company could not cover their dividend for four out of ten years. We don’t anticipate any increases to the dividend, but if the company can successfully grow EPS by 3% annually, by 2027 the dividend payout ratio could be reduced to 92%.

Given that the dividend is costing the company more than they are making in adjusted EPS for 2022, we do not consider the dividend to be safe or sustainable. A dividend reduction would not be surprising, but we expect the company will try to avoid this, if possible, as they may suffer an exodus of shareholders.

Final Thoughts

B&G Foods is a stable company with strong revenues, but the majority of their brands are simply not top tier, which may affect the pricing power of their products. At a time when the business and consumers are faced with increasing inflation, this may result in reduced volumes.

The dividend is stretched, and it has been for some years, which is why the company stopped raising it after a nine-year consecutive streak. If the company can successfully grow earnings, then the payout ratio may moderate. However, interest expense as a result of debt-fueled acquisitions weighs on earnings now.

Therefore, B&G Foods would be a risky holding for a dividend growth portfolio at this time.

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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