B&G Foods - Restructuring The Balance Sheet

| About: B&G Foods, (BGS)

B&G Foods (NYSE:BGS) recently announced that it is raising $700 million aggregate principal amount of 4.625% senior notes due 2021. The announcement further states:

B&G Foods intends to use the net proceeds of the offering to purchase all $248.5 million aggregate principal amount of its existing 7.625% senior notes due 2018..., to repay $222.2 million aggregate principal amount of tranche B term loans and approximately $40.0 million of revolving loans under B&G Foods' credit agreement, and to pay related premiums, fees and expenses. B&G Foods intends to use any remaining net proceeds for general corporate purposes, which may include the repayment of indebtedness and the acquisition of assets used or useful in, or the equity of an entity engaged in, B&G Foods' business or a related business.

The "remaining net proceeds" total approximately $148.6 million. The company also shows that its total long term debt (including the current portion) following the various transactions will increase to $838.3 million from $631.1 million.

I have been investing in B&G since October of 2007 when I bought their hybrid security (BGF) consisting of a 12% note and one share of common stock. Those notes were eventually called and I have remained invested in the common stock ever since. It's not an investment that will appeal to everyone as the company garners most of its growth by acquiring orphan brands from larger companies, frequently leveraging up its debt to complete the transactions. It is not unusual for the company's leverage ratio to exceed 4x.

The Dividend

The company's ability to acquire brands that are immediately accretive to free cash flow has allowed it to aggressively increase its dividend over the past few years. The dividend history is not uniform, although the company has paid a dividend every quarter since the start of 2005 (the IPO took place in October of 2004). The first dividend was $0.19 followed by 15 consecutive $0.21 quarterly dividends until the company stumbled in 2008. The dividend was cut to $0.17 at the start of 2009, was restored to $0.21 in the second quarter of 2011 and has been increased three times since then to its current level of $0.29.

With two acquisitions having taken place since the $0.29 dividend was first declared, I expect another increase to be announced later this year. In addition, the refinance of a large portion of the debt at substantially lower interest rates should provide additional resources to fund an increase. With Wednesday's closing price of $29.57, the dividend yield is 3.9%.

Using Options To Boost Yield

That yield is still not quite as attractive as I would like and I have been reluctant to pay more than $30/share. In a previous article I noted that I had used a covered call strategy reduce cost and to boost the yield on my most recent purchase of B&G:

...made on October 15th, 2012 at $28.00/share, when I also simultaneously sold May $30 covered calls. It was a pure income play, and the call premium of $1.35, along with the potential $2 capital gain, "ensured" that I would get the equivalent of more than 3 years worth of dividends should the shares be called away.

Those shares were assigned at the May expiration with a total return of 14% in 7 months. With the current price back below $30, and the November $30 calls trading at $1.40 bid/$1.70 asked, there is an opportunity to "ensure" more than two years' worth of dividends over the next 6 months:

$1.40 call premium + $0.43 capital appreciation + (2 X $0.29 quarterly dividends) = $2.41

I expect that I will make this trade at some point this month.


It is arguable that using options to boost the yield on this investment makes it more of a trade than an investment. However, I have B&G in my portfolio to generate income. As a result, I am indifferent whether that income comes from option premiums, dividends, capital gains or a combination of the three. If the shares are called away as were the previous ones, a new position will most likely be opened.

As I noted, B&G is not the right investment for all investors. Many will find the company's willingness to take leverage up to 5x too risky or worry that its growth through acquisitions will encounter problems. And, considering that CEO David Wenner now has an extra $148.6 million dollars burning a hole in his pocket, investors should expect another acquisition to take place sooner rather than later.

Disclosure: I am long BGS. 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 can be expected to execute the buy stock/sell call strategy discussed in this article at any time. In addition, I DRIP the dividends in this stock.