Flowers Foods : A Stickman Stock

| About: Flowers Foods, (FLO)

I first purchased shares of Flowers Foods (NYSE:FLO) in 2001. The sound of the dotcom implosion was still ringing in my ears, and I wanted an investment that was steady and a little bit boring. Flowers was perfect. A bakery that not only made bread, but paid it out too in the form of dividends. It was a business that I understood. Flowers made good stuff to eat and sold it for a profit. An investor with a piece of paper, a crayon, and a modicum of artistic skill could illustrate this concept. A large building with the word BAKERY above the door, a little delivery truck sitting out front, and a stickman waving goodbye as he climbs in the truck. I was going to hold my position in Flowers for a few years and then reinvest the money when something more lucrative came strolling by. Better sense prevailed.

In 1919, Bill and Joe Flowers founded the company in Thomasville, Georgia. In 1968 Flowers went public. In the mid-1990s Flowers, a regional bakery, initiated an expansion plan that resulted in it becoming a national food company. Along the way, Flowers acquired Keebler Foods and Mrs. Smith's frozen pies. By 1999, they were a $4.2 billion baked food company. They had three units; Flowers Bakeries, Mrs. Smith's Bakeries, and Keebler Foods.

In March of 2001, the company sold their Keebler unit to Kellogg (NYSE:K) and gave $1.24 billion back to its shareholders. In 2003 Flowers sold the Mrs. Smith's unit to Schwan Foods.

In the years I've owned Flowers Foods, there have been 5 stock splits. The splits occurred in 2001-03-05-07 and 2011. As you well know, splits in and of themselves are merely cosmetic. Most of these splits, however, came with dividend hikes. That fact, coupled with a reinvestment of dividends, can really whittle away at an investor's cost basis.

In 2011, Flowers operated 44 modern bakeries with sales of $2.2 billion.

Nature's Own, Bunny Bread, Sunbeam Bread, and Mrs. Freshley's are a few of the brands in the Flowers oven. Their basket of products reach 70% of the U.S. population with projections of 76% by 2016.

The stock yields 2.3% and the payout ratio is 60%.

The geographic growth of Flowers Foods both realized, and projected, is vividly illustrated in their Investor Fact Sheet. This inexorable march north has been made possible by prudent acquisitions. Since 2004, Flowers has made 10 acquisitions that have added $737 million in sales. Their acumen at buying what fits, and not overpaying for it, is the main reason Flowers isn't afraid to take on debt periodically to finance these ventures.

Flowers next asset purchase is waiting in the wings. Flowers is the "stalking horse bidder" for certain Hostess Brand assets. Don't you just love some of the terms used in finance; "Stalking Horse", "Corporate Raider", "Bullet-Proof Balance Sheet", "Hostile Takeover", "Poison Pill", "Turf Wars". Anyway, if this deal is consummated, Flowers will pay $360 million for 5 bread brands, 20 bakeries, and 38 depots. They are also planning to purchase the Beefsteak brand from Hostess for $30 million. Much to my relief, Flowers declined to go after Twinkies, the Hostess Brands crown jewel. My suspicion is that the financial discipline of Flowers would not allow it to pay the high premium the Twinkies brand will no doubt command. If you can avoid a bidding war, by all means, do so. If you can't, make sure you lose. One last thing on about Flowers role as "stalking horse". If their bid is trumped by another entity, Flowers is entitled to a breakup fee. The amount of the fee is at least $10 million. Hey, oats ain't cheap.

Acquire wisely and expand judiciously. It's a good plan. Can it fail? You bet. That's where you come in. Due diligence and all that. I can't predict the future any better than you can. All we can do is learn the facts and make intelligent decisions.

That being said, there is one thing I can tell you with absolute certainty. The stickman in my crayon drawing has a smiley face.

Disclosure: I am long FLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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