Late to the Party? Tread Lightly
If you have examined my previous articles, you will notice that I have been very worried about a phenomenon known as "Flight-to-Yield," a situation that occurs when a large amount of sidelined cash has been forced into the equity marketplace because of both high inflation and low risk free yields. As a result, investors both large and small have moved out of fixed income and into common stocks in an attempt to meet their income goals.
It takes but a cursory glance of well known dividend companies including Kimberly Clark (KMB), Johnson and Johnson (JNJ) and Procter and Gamble (PG) to see the effects of this influx of cash. Prior to the corrections in their share prices during the past month, P&G and KMB were yielding just over 3% - and though the businesses are without a doubt stable and excellent candidates for permanent holding - I believe that these companies are best purchased in bear markets - in which their income producing power is more fully realized through a protracted period of falling share prices. Other companies exhibiting this phenomenon in my mind are General Mills (GIS), Campbell Soup Company (CPB) and Kraft foods (KRFT). Though all these companies retain very attractive characteristics, dividend growth and are foundations of global industry - their prices are simply becoming far too high for my taste.
Where I'm Looking for Income: Mid and Small Cap Stocks
Though there are quite a few attractive investment opportunities through MLPs, Closed End Funds and BDCs that offer a very high yield - I am often hesitant to take the plunge because of the difficulty I have in understanding the stability of the yield and the nature of the underlying assets. This is a personal fault of mine, and I am sure that there are very attractive investment opportunities out there. Instead, I do what I know and look for companies in industries that I am capable of understanding. Food is one of them.
In comparison to their giant cousins, there are often small but hardy companies operating in the very same industries that offer attractive economics. Sometimes they furnish attractive dividends, a margin of safety, brand value -- all prospects which I believe are indicative of a robust, growing company. Even though these companies are obscure, they aren't "toads" - instead I like to think of them as princesses - albeit of small and obscure domains.
A cardinal virtue of seeking out small and medium sized companies with brand power of their own is the fact that large swaths of investors are unaware these companies even exist. In many cases - they don't even bother to look for them, mistaking the large size of their behemoth cousins as an indicator of safety instead of examining the earning power, interest coverage and relative strength during periods of economic decline or stagnation displayed by smaller more obscure concerns.
B&G Foods: Small, Hardy and an Appetizing Play in Niche Brands
One such company that appeals to me is B&G Foods (BGS). B&G has a diverse collection of brands which are common fixtures in households - including Ortega Salsa, Mrs. Dash, Brer Rabbit Molasses and Cream of Wheat. As we have recently seen with the acquisition of Heinz (HNZ), condiments with brand recognition provide an attractive value proposition because of their enduring nature in the consumer's psyche as well as the ability to retain pricing power to compensate for inflationary pressure.
I think that B&G provides an attractive alternative to a larger food company such as Kraft going forward. With a current dividend yield of 4.05% (exceeding KRFT) and an attractive portfolio of brands - B&G retains both the growth opportunities of a smaller to medium sized company, an attractive yield and potential for acquisition.
How Hardy? Examination of Debt Redemption and Common Dividends
Despite a large amount of positives surrounding B&G - it is important to discuss the possible reasons for the decline of the common equity during the financial crisis and its ramifications for careful investors going forward. As a company with the ability to generate a large amount of cash with relatively little capital investment, it is unsurprising that the common stocks of such companies trading at a higher multiple to book value would be exceptionally vulnerable during periods of widespread panic in the equity markets. I believe that exploring the dividend history of companies like this provides the most acceptable method of assessing their fundamental soundness going forward.
B&G initially started paying a regular quarterly dividend in 2004, of $0.19 per share, which was increased to $0.21 per share in 2005, a payment which was continued at the same rate until 2008. Though this yield was attractive - there was no growth. During the economic crisis, B&G foods experienced a considerable decline in share price and cut its dividend on its common to $0.17 per share. Despite this reduction in dividend payment of almost 25% - the company continued to pay a dividend to its shareholders, indicating that the enterprise was able to amply satisfy its fixed charges on its debt. I am happy to have the opportunity of hindsight when assessing this situation as the financial crisis often provides an investor with an important test of earnings power that is particularly useful - especially for those concerned with the merits of the company's debt.
I believe that going forward, B&G is going to show even more promise through taking advantage of low interest rates to refinance. The company recently tendered an offer to redeem its 7.625% 2018 debentures early - issuing a larger quantity of lower yielding 4.625% debentures maturing in 2021 in place of the 2018 offerings. Whenever I see companies do this I become very interested due to the large amount of savings to be had in fixed charges which could be either reinvested into expansion or returned to common shareholders through an increase in dividends. Since 2008, the dividend on B&G common has grown - returning to and then measurably exceeding pre-recession levels.
B&G appears to me as an example of a "small and hardy" investment that merits further attention during periods of broader stock market volatility due to the demonstrated endurance of the enterprise during past crisis, its strong brand portfolio and attractive dividend yield. In addition, since B&G has a market capitalization of only $1.5 billion, I believe that there is a significant possibility of it being acquired by one of its behemoth cousins. For someone investing now and during periods of broader market volatility, B&G will provide an attractive alternative to its larger cousins in the food sector.