B&G Foods (BGS) completed its recent additional public offering with underwriters exercising the full over-allotment. As a result, the company sold 4,173,540 shares at $30.25 per share, and raised $120.3 million after underwriting fees, discounts and expenses. Slightly more than half of the funds - $62.5 million - will be used to pay for its recently announced acquisition of the New York Style and Old London brands from Chipita America, Inc.
Historically, B&G has paid a hefty dividend relative to both its earnings and its peers. That differential relative to its peers had almost disappeared when the yield fell to 3.3% following a run-up in the price to $32.84 last month. Since then, the price of B&G has declined to just over $28 per share, or about 15%, and the yield has increased to more than 3.8%. That compares to J. M. Smucker (SJM) at 2.5%, General Mills (GIS) at 3.4%, Kellogg (K) at 3.4% and Pepsi (PEP) at 3.1%. The difference may still be too small for the increased risk many investors are willing to take on B&G.
Not only is there a high dividend payout ratio and a 4x debt to EBITDA ratio, but there is also the issue of integrating its latest acquisition. And, since the company now has an extra $60 million from the stock offering that is probably burning a hole in the pocket of B&G CEO David Wenner, it can be expected that B&G is currently shopping for another acquisition. The dividend yield alone is not quite attractive enough for me to commit more funds to B&G at this time.
Boosting The Yield While Lowering The Risk
I am currently in the process of building an income portfolio with funds from a recent pension buyout. Since the funds are now in a tax deferred IRA, the tax consequences of selling call options or worrying about qualified dividends and holding periods will be a non-issue. As recently as six months ago I would have invested more heavily in B&G when its yield was about 5%. Now, even with the retreat in the share price, I am still a bit reluctant to take a straight long position.
Instead, I have recently entered an order to simultaneously buy the stock and sell the $30 May call at a net price of $26.65. This serves three purposes. First the yield from the $1.08 dividend has increased to more than 4% on the net cost. Second, the lower cost to open the position has reduced the risk of owning the shares. Third, if one looks at this in a slightly different manner and considers the $1.35 call premium as an "incremental dividend", the annual yield is more than 8.6%:
($1.08 + $1.35) / $28 = 8.68%
If the shares are not called away in May, a new call option can be sold.
There is, however, a different "risk" associated with this type of transaction. If the shares are trading significantly above $30 at the expiration of the calls next May, the investor could be foregoing some incremental appreciation. In other words, the $1.35 per share that I am saving today means that if the shares are trading above $31.35 next May, the option holder will benefit from that appreciation.
I have held B&G for a number of years and continue to re-invest the dividends. I have watched the company cut the dividend, and subsequently increase the dividend three times since the end of 2010. I have also watched the company integrate acquisitions with varying degrees of success. At the current prices, though, I am reluctant to take a straight long position. Using the covered call strategy outlined above has made investing in B&G attractive enough where I am willing to take on the risks.