Heading into its first quarter earnings call, I expected B&G Foods (BGS) to post strong growth figures in revenue and net income because of its acquisition of New York Style® and Old London® brands from Chipita America, Inc. in the fourth quarter of 2012. It was no surprise that the headline figures showed:
- Net sales increased 8.8% to $171.2 million
- Net income increased 17.0% to $19.6 million
- Diluted earnings per share increased 5.7% to $0.37
- EBITDA increased 7.2% to $45.7 million
The company has grown rapidly over the past several years by acquiring orphan brands from larger food companies, and investors have seen these accretive acquisitions result in higher share prices and rapidly rising dividends.
|Closing Share Price||$13.73||$24.07||$28.31|
|Annual Dividend Rate at Year End||$0.68||$0.92||$1.16|
First quarter we saw volume go down 1.7%, second 3.6%, third quarter was down 1.9% improving, and if I discount Sandy it could be that volume was down 1% in the fourth quarter. So, there's an improving trend here. We just didn't quite get there and when you look at Nielsen, you can see that things are crawling back to flat in all of the categories, but they're not there yet.
In the first quarter the company not only crawled "back to flat," but according to Wenner, "our base business excluding the acquisition done last October, grew by 1.6%, almost all of that volume related." While this is good news for investors, Wenner also dampened expectations when he later discussed the need for trade discounts and stated:
One thing this decision does indicate is that the volume environment is still challenging, but still more manageable than it was in 2012. Extraordinary events such as the challenges we saw in the Northeast and fourth quarter, as a result of Hurricane Sandy, appear to have passed, with the possible exception of continued effects on small food service operators in the New York, New Jersey area. Our supermarket business in the Northeast was actually up for the quarter despite the business challenges some of our customers in that area are experiencing.
Despite the "challenges", the earnings call was mostly positive. Some of these positives included:
- Growth of 2% across most sales channels and 18% for the drug and dollar stores (although the 18% is off a very low base).
- Debt to EBITDA leverage declined slightly to 3.5x, positioning B&G to make its next acquisition.
- Manufacturing costs are expected to decrease slightly.
At current share prices, B&G pays a 4% dividend which compares very favorably to other food product companies. Wenner discussed the dividend and returning cash to shareholders during the call.
As of yesterday's market close, our stock price today is 24% higher than it was at the end of first quarter 2012. At the current dividend rate, we will pay approximately $61.3 million in dividends in 2013 versus $50.2 million in 2012, a 22% increase. We have said many times that we are focused on creating shareholder value and returning a meaningful amount of cash to shareholders as part of that commitment, and I believe we have delivered on that commitment in 2012.
As shown in the above table, the dividend has increased significantly over the past three years. I expect a further increase later this year.
The company saw some weakness in the first quarter from its Mrs. Dash and Polaner brands. Mrs. Dash weakness was the result of "a 5.1% decline in sales due to club rotations that did not repeat." Polaner faced difficult comps because of accelerated purchases ahead of a price increase in the previous year.
Despite these weaknesses, the unit volume growth came back and was encouraging. Also encouraging was the increase in 2013 EBITDA guidance from $178-$182 million to $180-$184 million. Has B&G turned the corner and is it a good investment?
I am still concerned about the effects of the payroll tax increase. A recent Bloomberg article had the ominous title Retail Sales in U.S. Decline by Most in Nine Months.
Consumer spending had held up early in the year even as taxes took more from Americans' paychecks. Congress agreed to a fiscal pact on Jan. 1 that allowed the tax used to finance Social Security to revert to 6.2 percent, where it was in 2010, from 4.2 percent.
"Households are now making those difficult choices on how to adjust spending," said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York, who projected sales would drop. "We have no steam going into the second quarter."
The payroll tax was also cited as a concern by Wenner on the previous conference call. In addition, many conservative investors will find the leverage ratio of B&G too risky, a ratio that Wenner is ready to take higher with a new acquisition. Those investors may also be concerned about the company's ability to successfully launch more than 20 new products in 2013.
For me, the dividend remains attractive, and is a major reason I continue to hold the stock. The other, equally important, has been the recent success of the company's acquisition strategy. I find these benefits justify the risks.
Additional disclosure: I have sold May $30 covered calls against a portion of my BGS position.