B&G Foods - The Case Of The Missing Dividend

Apr.30.13 | About: B&G Foods, (BGS)

I suspect that many investors looking for income use different types of screening devices to look for yield. Whether it is the tools on various trading platforms or lists of those stocks with the highest yield in business sections of daily or weekly newspapers or magazines, the selection starts with looking at the quarterly dividend. Investors may further filter out their selections by limiting selections to those that have a long history of paying out dividends, steadily increasing their dividends, or both. What many fail to realize, at least until tax time comes around, is that those dividends may not even be dividends. And, if the position is in some type of tax advantaged account, the investor may not even find out at that time.

I have been writing about a number of stocks on Seeking Alpha for nearly two years. Almost all of these make some type of quarterly payment. However, many of those I recommended don't actually pay a traditional dividend. Five of these companies are Cedar Fair, LP (NYSE:FUN), Suburban Propane Partners, LP (NYSE:SPH), Frontier Communications (NYSE:FTR), Sirius XM Radio (NASDAQ:SIRI) and B&G Foods (NYSE:BGS).

Cedar Fair

In some cases, it is more obvious than others. Cedar Fair and Suburban Propane have LP after the name which stands for Limited Partnership. These two companies pay out a nice quarterly distribution. In the case of Cedar Fair, the annual distribution is $2.50, and based on the recent closing price of $42.01, the yield is 6%. This operator of amusement parks, water parks and linked hotels, has increased its distribution dramatically over the past three years after slashing it several times. The distribution fell from a quarterly rate of $0.48 in early 2009 to a quarterly rate of $0.25 by the end of that year, to a single $0.25 payout in 2010. But, this is not a dividend. Cedar Fair pays a partnership distribution and investors receive a Schedule K-1 at the end of the year instead of a 1099-DIV. Does it make much difference?

Yes, and no. Most commercial tax software packages easily handle the complexities, although the differences can appear daunting. And, even when the units (as opposed to shares) are held in IRAs, there is a category of unrelated business income and losses that must be tracked and reported if it exceeds certain levels. Fortunately, many brokerages will handle this for LP owners.

Suburban Propane

Suburban Propane is another LP, although it has a much more consistent record of distributions. Each year for well over a decade, Suburban Propane has increased the annual amount of the payout. At times, the distribution has been the same for seven consecutive quarters, but the annual payout rose. And, some of those increases required a magnifying glass and a forensic accountant before they could be located. Regardless, the current quarterly distribution rate of $0.875 ($3.50 annual rate) provides a yield of 7.2%.

These distributions, like those of Cedar Fair, bear little relationship to taxable income. Not only can the losses exceed the distribution, but there are potential Alternative Minimum Tax implications as well. And like Cedar Fair, even when the units are held in IRA-type accounts, there may be a requirement for IRS reporting.

B&G Foods, Sirius XM & Frontier Communications

So, what do the two LPs have in common with Sirius XM, Frontier Communications and B&G Foods? These three companies in very diverse industries made distributions that also were not, at least in part, ordinary dividends. A component of the dividends of each of these was classified as return of capital. Investors holding these dividends in taxable accounts, and who expected to have the distributions eligible for the preferential tax treatment afforded to dividends the past several years, found out that only a portion of the distribution was eligible. The remainder was classified as "return of capital."

This occurs when the dividend exceeds the earnings or profits of the company. When an investor receives this type of distribution, the cost basis of their holding is adjusted downward. If it occurs over a long enough period of time, or their cost basis is exceedingly low, a capital gain may need to be recognized. The classification of a portion of the distribution as return of capital should have come as no surprise to owners of Frontier.

Frontier, which closed at $4.14 on Monday, pays a $0.40 dividend (a 9.8% yield). This rural phone company has invested heavily in infrastructure over the past several years to build out higher speed Internet availability. At the same time, it has continued to lose access lines. And, even though it cut the dividend by 60%, earnings fell further. Over the past four years, beginning with the second quarter dividend in 2009, the dividend increasingly was comprised of return of capital. That year, nearly 30% was return of capital. By 2010, despite a dividend cut, nearly 70% was classified as return of capital and it grew to nearly 80% in 2011. Following a second dividend cut in 2012, the non-dividend distribution declined to just over 20%.

Sirius XM paid its first and only common stock dividend late last year. The $0.05 dividend was paid at the end of last year, and many investors thought they were getting an ordinary dividend. Most, however, subsequently found out that only about half the distribution was an ordinary dividend when they received their 1099. I believe that the Sirius XM dividend was a one-time event, and is unlikely to be repeated before the previously announced share repurchase program is completed.

B&G Foods

The last, and for me the most surprising, company on this list is B&G Foods. B&G currently pays a $1.16 annual dividend, and based on the recent closing price of $30.81, yields 3.8%. The company has raised the dividend four times since the end of 2010 for a total increase of more than 70%. In addition, the reported earnings certainly appeared to exceed the dividend payout.

In any event, over the past two years, not only has a large portion of the distribution been classified as non-dividend, but the amount is growing. In 2011, the non-dividend portion of the $0.86 distribution was just under 30%, and in 2012 the amount had grown to 58.2% of the $1.10 distribution. Should investors in B&G care? Unlike Frontier, where declining revenues and the yield of nearly 10% raises caution flags, B&G appears to be a much more stable investment. It is a company that has grown through accretive acquisitions over the past few years, and after a rocky 2012, had resumed organic growth in the first quarter of 2013.

B&G has had remarkable success with its acquisitions over the past few years and frequently leverages up the balance sheet to acquire brands from larger food product companies. As the acquired companies' EBITDA and debt repayment brings its leverage back down, investors have been rewarded with growing dividends. On the recent conference call, CEO David Wenner noted:

Commenting briefly on our balance sheet and capitalization, it's worth noting again that we have reduced our leverage to 3.5x EBITDA as of the end of the first quarter. This means that our business is very well positioned to act on a potential acquisition of reasonable size, should the right acquisition appear.

The willingness of the company to leverage up to 4.5x or higher may be considered too risky by some investors. On the other hand, the 3.8% dividend, one that has grown rapidly in recent years, may be enough for other investors to ignore the leverage.


Is an investment in B&G or Cedar Fair or Suburban Propane worth the extra record-keeping? The yields on the two LPs are attractive and the dividends/distributions are the reason I own these three along with Frontier. At the current price level I find it difficult to recommend someone buy any of these four, although I will continue to hold and re-invest dividend and non-dividend distributions.

Fortunately, since I only have shares of these companies in IRA accounts, the K1s and record keeping associated with adjusting the cost basis is not an issue and it's not a decision I need to make. But it would certainly be nice to know ahead of time if the dividend was really a dividend or if nearly 60% was going to be missing.

Disclosure: I am long BGS, FUN, FTR, SPH, SIRI. 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.

Additional disclosure: I have covered calls written against some of my positions in B&G, Cedar Fair, Frontier and Sirius XM. I also routinely trade blocks of Sirius XM and engage in dividend capture strategies with Frontier.