B&G Foods Dividend Increase Later Than Expected

| About: B&G Foods, (BGS)


B&G increases annual dividend by $0.04.

Shares continue to move higher.

Current yield of 6.3% remains attractive.

B&G Foods (BGS) has finally announced a $0.01 increase in the quarterly dividend to $0.475 from $0.465. The previous payout had been flat for the previous six quarters, so one could easily think "It's about time!" On the other hand, it's not as though the company previously hadn't gone six quarters without an increase. From March of 2014 through May of 2015, the company also went six quarters without an increase. During the five quarters between those two six-quarter periods, the company increased the dividend twice, and it was by a rather substantial total percentage - a quarterly total of $0.08, or 23.5%.

Unfortunately, the history of the company's dividend increases (and its one cut) are very, very erratic. I have written about this before, but for those less familiar, this is what it's been like to own this stock:

The annual dividend rate started at $0.85 when the company went public in late 2004. It was forced to cut the dividend to $0.68 in late 2008 as the Great Recession and a sharp increase in wheat prices cut into margins. It remained at $0.68, or $0.17 per quarter, for the next nine quarters. The quarterly rate was then increased to $0.21 for three quarters, went to $0.23 for the next quarter (bringing the annual rate back to the initial payout rate), then jumped to $0.27 for three quarters, $0.29 for another three quarters, then consecutive quarterly increases to $0.32, $0.33 and $0.34. It remained at $0.34 for a year and a half.

That "year and a half" was the first of the two six-quarter periods cited above.

It's not only the six quarters without a dividend increase that I found surprising. I had expected a dividend increase to be announced last year, and wrote about it in an article titled, Despite Potential Dividend Increase, Market Yawns As B&G Foods Announces Accretive Acquisition. That article was about the Back To Nature purchase and how the expected EBITDA from that purchase would translate into a dividend increase.

B&G has a very aggressive dividend policy. CEO Bob Cantwell has continually cited the strategic objective of the company was to make accretive acquisitions where 50%-60% of the projected Adjusted EBITDA would turn into Free Cash Flow ("FCF"). And of that FCF, approximately half would be used to fund an increase to the dividend.

The Back To Nature purchase was expected to generate $17 million, and in the previously mentioned article I wrote:

That would suggest that $4.25 million could be available for a dividend increase:

Half the $17 million EBITDA --> $8.5 million free cash flow.

Half the $8.5 million free cash flow --> $4.25 million dividend increase.

The 10-Q for the second quarter showed that the company had 66,496,333 shares outstanding as of August 4, 2017. That would indicate that there is the potential for an annual dividend increase of ~$0.06/share. That would bring the dividend up to $1.92 per share, and based on a recent price of $31.25, the yield would increase to 6.1%.

... IF, and it is a big if, the company is able to meet its Green Giant targets in the second half of the year, I fully expect to see a quarterly increase of a penny per share early next year.

Green Giant frozen products did well in the second half of the year, but the dividend increase came several months later than I expected. It appears to have been timed to coincide with the board meeting that took place just prior to the annual shareholder meeting. The question for investors should be, "Was the dividend increase a good idea at this time?"

On the one hand, the increase indicates that the board and management feel that the increase is sustainable. Equally important is that it would also suggest that the company is having a decent Q2 and is on track to meet its guidance. This is good news for investors. On the other hand, the company is also in the process of reducing debt and buying back shares. All three of these uses of cash - share buyback, debt reduction and dividend increase - are using the same limited cash resource.

With the debt leverage already rather high, this could make make the company's strategic objective of purchasing an accretive acquisition more challenging. B&G management likes to have enough liquidity to opportunistically pay cash for acquisitions. In the past, when the debt leverage was already high and the company wanted to raise more cash, it would sell more common stock.

B&G raised cash in this manner during two of the past three years. It sold 4.2 million shares during 2015 and another 8.35 million shares in 2016. After a pause in 2017, is it preparing to sell more shares so that it's ready for the next acquisition? It's just possible that the increase in the dividend was to make the stock more attractive prior to selling more shares. Since it will also dilute the ownership of the current shareholders, it's also time for investors to decide if they trust management to choose the right acquisition.

I have watched B&G management complete many acquisitions over the past decade, and not all have been successful. However, since the end of 2008, those acquisitions have fueled an increase in the quarterly dividend from $0.17 to the current rate of $0.475, an increase of 179%! While I might wait until a new share offering takes place before adding shares (other than through dividend re-investment), I will continue to keep B&G as one of my core income producing stocks.

Disclosure: I am/we are long BGS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have covered calls with $30 and $35 strike prices written against a portion of my positions, and as these expire, I would expect to write additional calls. I have no immediate plans to add to my position other than through a DRIP.