B&G Foods (BGS) CEO David Wenner was recently interviewed by Jim Cramer on "Mad Money." Cramer has been a fan of Wenner for a while, so when I tuned into the interview I wasn't expecting any tough questions about the high level of debt and how it might limit the flexibility of the company in the future, nor was I expecting anything particularly revealing. Cramer did not surpass my expectations, although Wenner did reveal some information that explained how B&G looked at potential acquisitions and how his company was able to breathe new life into its acquired brands.
For those unfamiliar with B&G Foods, it is a manufacturer and distributor of shelf stable foods and other products that include many well-known brands. Some of the better known brands are Accent, B&M Baked Beans, Cream of Wheat, Mrs. Dash, Ortega, Polaner, Static Guard and Underwood. Over the years it has grown through acquisitions, unit volume increases and price hikes. B&G has also been aggressive about returning capital to shareholders in the form of dividends with the current dividend yield approaching 5%, a rate that is significantly higher than larger competitors. These competitors include J. M. Smucker (SJM) at 2.5%, Kraft (KFT) 3.1%, Kellogg (K) 3.3%, General Mills (GIS) 3.2% and PepsiCo (PEP) 3.3%.
A key to B&G's success has been the ability to take neglected brands and leveraging the name recognition by adding new products. This could be as simple as offering smaller size packages for sale trough dollar stores or it could be offering alternatives to traditional products as it did by adding Cinnabon and chocolate flavors to Cream of Wheat. One of Wenner's criteria when evaluating acquisitions is to seek out "under-invested" brands. He discussed Mrs. Dash, a Brand that B&G purchased from Unilever as part of the Culver Specialty Products (or CSP) portfolio late last year, and explained:
...it's a brand where at the very least we can't find any new product activity in the last three years. And that's about as far back as we can figure. And it makes sense in the context of Unilever, because a successful Mrs. Dash new product is going to do $4 million in sales. So that's meaningless to Unilever. It's a waste of their time. To us it's very meaningful. Those are the kind of brands we pick out of big food companies when they put up for sale. They mean something to us. We get behind them. We launch new products. We pursue distribution and grow the brands where they were declining under the big companies.
But there is more to the company's success than simply acquiring neglected brands. It is also how it controls costs when expanding the offerings. In response to a question by Cramer about the costs to develop and introduce new products, Wenner spoke about adding the chocolate flavored Cream of Wheat:
...we do it all in-house. Our quality assurance people at our facility that make this product did an awful lot of the work. We do a little bit of outside consulting, depending on the product. But a lot of times it's done with very low cost. And we don't do the huge market research that a large company would do either, you know, it's more of a gut call of we think this is a good idea. We're going with it.
While hearing it's "a gut call" may be disconcerting to some investors, it has worked very well for B&G. Last year the stock was one of the top performers on the NYSE, increasing more than 75% while the dividend was increased twice. The dividend was again increased earlier this year by 17.4% to a $1.08 annual rate. As of March 12, the shares had declined YTD by more than 6% to $22.59.
The acquisition of CSP required the company increase its debt substantially, even though the acquisition should be accretive to earnings and provided enough extra FCF to allow for the dividend increase. That increase in debt brought the company's leverage up to 4.5x, and Wenner's comments about being comfortable with leverage up to 5x might make many investors uncomfortable.
B&G Foods' recent increases in leverage and the company's policy of returning cash to shareholders in the form of large dividends may hinder its ability to aggressively pursue attractive acquisitions in the near term. In addition, the company's level of leverage or the CEO's statement that he decides about new product introductions based on "a gut call" may make investing in B&G too risky for conservative investors. For others, the attractive dividend and the company's successful integration of previous acquisitions make this an opportunity that is too good to ignore.