B&G Foods (NYSE:BGS) increased its dividend by 10.3% last Thursday from $1.16 to $1.28 per share. As a result, the share price has risen more than 4% from Wednesday's closing price of $33.78 to Friday's closing price of $35.18. The current yield is 3.6%.
The boost in the dividend is not at all surprising, even though it is the fifth time since the end of 2010 that there has been an increase. Investors have come to expect this from CEO David Wenner who continually promotes B&G as being very shareholder friendly. The company has followed a fairly regular program of making an acquisition that is immediately accretive to free cash flow, and then raising the dividend.
This latest increase can be attributed to B&G's acquisition of the Pirate Brands for approximately $195 million in cash. The transaction, which was announced June 10th, closed on July 8th. When the acquisition was announced, I wrote:
I expect that B&G will once again increase its dividend before the end of the year, but the size of that dividend increase may be less than some investors would like. It appears that Wenner may choose to return value to shareholders more through share price appreciation rather than dividends. It's not that there is anything inherently wrong with such an approach, but it is a departure for those looking for dividends rather than capital appreciation.
The dividend, payable on October 30th to shareholders of record on September 30th, was somewhat larger than the $0.08-$0.10 increase I had expected. I remain neutral on the stock based on current valuation, although the market does not seem to share my concerns. The shares remain close to the stock's all-time closing high of $36.
It's my view that B&G has become a riskier investment over the past year with its string of snack food acquisitions. These acquisitions are a new market segment for the company and they differ in several respects from acquisitions made in the recent past. I previously pointed out some of these aspects, which included the acquisition of a manufacturing facility, a sales organization and even an entire business. Also included was a growing business as opposed to other companies' orphan brands that had been neglected.
Rejuvenating a well known brand acquired from a much larger company has worked well for B&G and was an area of demonstrated accomplishment. The snack food brand acquisitions included a business that had been growing in double digits, and B&G paid a higher multiple for that growth. It now faces integration tasks that will be different than those in past and likely will also be more of a challenge.
And while this will be taking place throughout the remainder of the year, Wenner shows no sign of slowing down the pace of acquisitions. On the recent conference call he noted:
As Bob [CFO Bon Cantwell] mentioned earlier, following the completion of the Pirate Brands acquisition, our net leverage is roughly 4.3x adjusted EBITDA, leaving room for further M&A activity should the right acquisition become available. Although we are quite busy, having completed 3 acquisitions in the past 9 months, we have both the organizational ability and the financial ability to continue to pursue meaningful accretive acquisitions should the right opportunities arise.
So, while the 4.3x leverage is already high, Wenner appears ready to push it higher and increase the risk to shareholders.
Wenner has shown an ability to smoothly integrate acquisitions in the past and shareholders have been well rewarded with share price appreciation and hefty dividends. The past success that resulted in a rising share price also resulted in a declining dividend yield. The drop in yield is despite an 88% increase in the dividend since the end of 2010. At that time the dividend was $0.68, the share price was $13.73 and the yield was 5%.
I will continue to hold shares of B&G, but will not be adding to my position (other than through automatic dividend re-investment) until I am comfortable with the progress of the snack food integrations. Is this position justified? Wenner had this to say about the first of the snack food acquisitions on the second quarter conference call:
The snack brands that we acquired last October and in early May contributed $14.1 million of sales to the quarter, $10.9 million and $3.2 million, respectively. The $22.2 million in net sales for the first half attributed to the New York Style and Old London acquisition is in line with the low end of our annual projection for those brands.
The high leverage, the willingness to increase that leverage to make further acquisitions while digesting the three most recent acquisitions, and the failure of the brands purchased in October to exceed the low end of the company's projections are enough justification for caution on the part of this investor.
Additional disclosure: I have sold November $30 covered calls against a portion of my position.