Reconsidering B&G Foods

| About: B&G Foods, (BGS)

In mid-June I recommended B&G Foods (NYSE:BGS) as a good stock to own in an IRA because of its healthy dividend and reasonable growth prospects. Within a week, the stock price increased more than 15% and I decided to rescind the recommendation in a follow-up article. This decision was based solely on valuation and the belief the share price increase wasn't warranted at that time. I also felt there were other, more attractive opportunities in the food sector. I also recommended a covered call strategy and wrote "And for those unwilling to engage in a call writing strategy, it is probably more advantageous to wait for a pullback in the share price."

That pullback occurred yesterday when the stock dipped to $17.75. Unfortunately it did not stay there long and closed at $18.51. As I write this, the stock is trading at about $19 and the yield is a bit below 4.5%. As an income play, I would still like the price a bit below yesterday's close. But for an alternative income play, I still like buying the shares and selling covered calls, especially the February $20s which are currently at $1.25 bid. Added to the two dividends between now and the call date, the return is about 9% in less than seven months.

What happened yesterday? B&G Foods released earnings after the market closed on July 26. EPS beat estimates by a penny and revenues were in line with expectations. Management reiterated its full year earnings guidance. Seems like good news, right? Well, the share price fell nearly $2, or almost 9%, the next day. Was it an overreaction?

When David L. Wenner, president/CEO of B&G Foods, was asked about the price action during an interview on James Cramer's Mad Money, he said:

I think we spoiled investors and analysts by having quarter after quarter of increasing our projections .... We'll do for the year what we said we were going to do and the reaction is what you saw, but we're still projecting an increase for the second half. Nothing is broken here except that we didn't raise the projection even further.

When questioned about the safety or a potential cut in the dividend, he replied:

That's outrageous. After we pay interest, taxes and capex we're giving out 55% of our free cash flow, so if anything, I expected a knock of you're putting too much of your cash on the balance sheet and you need to give out more in dividends and the dividend absolutely is not at risk at all.

The company had some negatives in the report. As expected, costs were increasing, including the cost of corn syrup and packaging. PepsiCo (NYSE:PEP), whose Frito-Lay division competes head to head in certain markets, noted the same cost pressures. What was a bit more surprising was "a net decrease in pricing of $1.5 million and an increase in coupon and slotting expenses of $1.2 million." These factors were probably also instrumental in the share price decline. There have also been some headwinds at supermarket chains and more pressure from private label products.

It expects to be able to raise prices later this year and has had strong growth in dollar stores and Wal-Mart (NYSE:WMT). It still remains a well-managed company, the balance sheet is good and it's always looking to increase product offerings by buying products that the larger companies find are too small to bother with. My only reservation is that I am a bit greedy when it comes to the dividend, and would like to see the price just a bit lower before owning more shares as a straight dividend play.

Disclosure: I am long BGS, PEP.

Additional disclosure: I have sold covered calls against BGS and PEP in the past. I also may buy more shares of BGS or PEP at any time.