Last Wednesday, B&G Foods (BGS) presented at the Barclays Global Leveraged Finance Conference. I had fully expected to hear that the company was reiterating its full-year projections that had been slightly adjusted with its Q2 earnings release. That adjustment increased its full-year revenue guidance to account for the company's acquisition of Clabber Girl, which occurred midway through Q2.
Although the Q2 earnings release included an increased guidance range for revenue to $1.665-1.700 billion, the Adjusted EBITDA was only reaffirmed at a range of $305.0-320.0 million and adjusted diluted earnings per share was only reaffirmed at a range of $1.85-2.00. In a prior article, I wrote that I had been disappointed that an acquisition that was supposed to have been immediately accretive to both Adjusted EBITDA and EPS wasn't showing up in those reaffirmed figures. I also noted that I was disappointed that no shares had been purchased under the company's new share buyback program through July 29th.
In fact, the shares outstanding had modestly increased since the end of Q1 as a result of stock grants to the board of directors, its chairman and the company's newly promoted CEO, Ken Romanzi. To be clear, I am rarely in favor of share buybacks. They frequently occur when companies are doing well, flush with cash and the share prices are high.
A number of years ago, a study by Credit Suisse about share buyback programs approached the buybacks as an investment option and found the following:
There are 306 companies or 61% showing a positive return, 154 companies or 31% with a negative return and 40 companies that had no buybacks over the past eight years. But if you were to benchmark against a cost of equity of let's say 7%, we find only 180 companies or 36% that beat the benchmark. As a result it looks like most of the buybacks for the S&P 500 over the past eight years have not yet added much value for the remaining shareholders.
Not only that, but new shares are often granted to company employees and executives, diminishing the effect of the buyback. In the case of B&G, the grants were relatively small, 77,907 on top of the 65,297,607 outstanding just prior to the grants, or an increase of just over 0.1%. So, what happened at the Barclays conference that was good news?
B&G likes to stress its long-standing dividend policy, and did so once again during its presentation at the conference. The chart below shows that the company has returned nearly $900 million in dividends to shareholders since going public and $957 million overall. When the company makes its next dividend payment at the end of October, and if it continues to repurchase shares, that total could climb to $1 billion by the end of the year.
Less noticeable was an update on its current $50 million share repurchase authorization. Buried in a footnote in small print on one of the company's charts, we saw the following:
The barely readable second footnote states:
Includes 1,180,093 shares of our common stock repurchased for an average price of $18.71 per share or $22.1 million in the aggregate (excluding fees and commissions) from August 1, 2019 through August 31, 2019.
The current $1,90 dividend was costing the company more than 10% on the shares repurchased for $18.71. The fact that the yield is so high is a clear indication that the market has decided that the dividend is unsustainable. I continue to disagree with the prevailing market "wisdom".
Instead, I consider the continued buyback to be very good news for investors, especially those that may have concerns about the sustainability of the dividend. The fact that B&G spent millions on share repurchases last month can be taken as an indication that management and the Board of Directors are confident in the company's ability to maintain the current dividend.
Equally important, the company will start saving $560,544 each quarter, or an annual rate of $2,242,177, in dividend payments. It is most likely drawing down the revolver to make these purchases. The current interest on the revolver is:
... determined based on alternative rates that we may choose in accordance with the credit agreement, including a base rate per annum plus an applicable margin ranging from 0.25% to 0.75%, and LIBOR plus an applicable margin ranging from 1.25% to 1.75%, in each case depending on our consolidated leverage ratio.
Considering that the revolver has an unused commitment fee of 0.5% and the current 1-year LIBOR is less than 2%, it seems safe to assume that the cost of this revolver borrowing would be less than 3.5%. That would be quite attractive considering that they were paying more than 10% in dividends on the 1,180,093 shares that were retired. We can calculate the cash savings as follow:
Cost of purchased shares = 1,180,093 shares x $18.71 = $22,079,540.03
Dividends on those shares = 1,180,093 x $1.90 = $2,242,176.70
Annual Interest Cost to buy shares = 3.5% x $22,079,540.03 = $772,783.90
Annual Cash Savings = $2,242,176.70 - $772,783.90 = $1,469,392.80
Also, when one is looking at the cash flow, one needs to take into account the tax implications. There is no tax benefit to B&G for paying dividends. We can look at the income statement to do some rough calculations on the tax benefit to the company as follows:
YTD Net Income Before Taxes = $47,231,000
YTD Taxes = $12,189,000
Income Tax Percentage = $12,189,000 / $47,231,000 = 25.8%
Therefore, the annual incremental interest expense reduces B&G's tax obligation by:
$772,783.90 x 25.8% = $199,378.25, bringing the total cash savings up to
$199,378.25 + $1,469,392.80 = $1,668,771.05
While it's not a great deal of money, the EPS impact should be an annualized rate of $0.026. And, if the buyback were to continue and the full $50 million authorization is used to buy more shares at similar prices, the total would increase to nearly $0.06 per share, or roughly an increase of 3% over current guidance (again, on an annualized basis).
And, of course, the additional cash savings improves the dividend coverage on the remaining shares outstanding.
It's true that there are a number of assumptions in extrapolating the purchases that occurred in August to the full year. However, it is clear that the buybacks that have already occurred will have a positive impact on B&G's EPS and dividend coverage. I just wish that the company had emphasized the positive benefits instead of burying it in small print in a footnote.
Regardless, that buyback, the improved dividend coverage and the cash flow savings are good news for investors in B&G Foods.
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 currently have several long-term core positions in various accounts where I am reinvesting the dividends. I also have written covered calls against several of these positions, and am trading additional shares around that core position. I have no position in any other company mentioned in this article.