B&G Foods: Solid Earnings Expected

Oct.24.11 | About: B&G Foods, (BGS)

When B&G Foods (NYSE:BGS) reports earnings on Tuesday after the market closes, I am expecting to see a solid earnings report with the possibility of an upside surprise. This expectation is based primarily on the company's announcement last Tuesday to increase the dividend 9.5% to $0.92 per share. This increase comes on top of the 24% dividend increase announced on February 24th of this year.

The February dividend hike had also been accompanied by news that the company would be repurchasing up to $25 million of stock and/or debt. The idea of simultaneously reducing debt is also viewed as positive as it will give the company greater flexibility if future brand acquisitions become available. I was not as thrilled with the idea of a share buyback.

I have always been a strong advocate for the return of capital to shareholders through dividends rather than share buybacks. Dividends, and especially significant dividend increases, represent confidence by the company in its ability to continue to return capital on a regular basis. This type of commitment is not undertaken lightly as management does not want to face the shareholder wrath that comes from dividend reductions. Share buybacks represent a one-time use of excess cash and are usually couched in terms that lack commitment. In B&G's case:

... its Board of Directors has authorized a stock and debt repurchase program for the repurchase of up to $25.0 million of the Company's common stock and/or 7.625% senior notes due 2018 through March 31, 2012 ... the Company may purchase shares of common stock and/or senior notes from time to time in the open market or in privately negotiated transactions.

Terms like "up to" and "may purchase" are much weaker than the implied commitment of regular quarterly dividends. These two dividend boosts this year are very good news for shareholders. And, as I noted, the second dividend boost is one of the reasons I expect to see some positive upside surprise in earnings.

It is not the only reason. The company has noted on its conference calls that it typically engages in some commodities hedging activities, primarily wheat used in its largest seller - Cream of Wheat cereal. This has enabled it to maintain prices and profit margins. Clearly the company would not be raising dividends if it was facing pricing pressures or margin squeezes. The company also is likely to benefit from the falling prices of energy. According to a CNBC interview last July with CEO David Wenner:

The packaging is going up very rapidly. There's a good number of our products that the packaging costs more than what's inside ... anything in glass. The cans are getting more expensive. Plastic is getting more expensive.

Wenner noted that the largest cost of many of its products is the packaging. I would expect the falling prices of energy will benefit B&G from both a packaging and transportation cost perspective.

For those unfamiliar with the company, B&G Foods and its subsidiaries manufacture, sell and distribute a diversified portfolio of high-quality, shelf-stable foods across the United States, Canada and Puerto Rico. Its products, including Cream of Wheat cereal, Ortega salsa, Polaner jellies and B&M baked beans, compete for supermarket shelf space with other food product giants.

B&G has a dividend yield above the competitors in its sector. The $0.92 dividend yields just over 5% based on Friday's closing price of $18.35. General Mills (NYSE:GIS) 3.1%, Kellogg (NYSE:K) 3.1% and Pepsi (NYSE:PEP) 3.3% all compete with its cereal and other companies in the sector like Kraft (KFT) 3.3% and Sara Lee (SLE) 2.6% pay out at much lower yields. Is B&G paying out too much and is the dividend safe?

Wenner made two other points in that interview that should give investors confidence in the dividend.

After we pay interest, taxes and cap-ex we're giving up 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 dividends. And the dividend is not at risk at all.

He certainly backed up that July statement by increasing the dividend this past week. B&G also has higher margins than its competitors. In fact, in response to a question about whether the company should get rid of its lower margin or poorer performing brands, Wenner said:

No because the worst ones we've had are at an industry average ... So when we look at our portfolio, we look at the bottom tier of brands and say these are good brands. They're not superior brands like the ones at the top, but they're good brands and no reason to get rid of them.

I should point out that I have written about B&G in the past. I originally recommended buying it for the yield, then altered my strategy when the price moved up more than 15% in a week. I then recommended buying the shares at a price below $18.50 after reviewing the second quarter earnings.

This time I thought I'd write up my opinion before the earnings are released. I am expecting really good news on Tuesday. And, worst case if I'm wrong, I'll be collecting that 5% dividend.

Disclosure: I am long BGS, SLE, PEP.

Additional disclosure: I have no positions in any of the other stocks mentioned in this article and no plans to initiate and buy or sell orders on any of the stocks in the next 72 hours. I covered calls against my SLE position and may, at any time, engage in the trading of covered calls against any of my long positions.