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B&G Foods: The Ultimate Yield Trap

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About: B&G Foods, Inc. (BGS)
by: Wealth Insights
Wealth Insights
Dividend growth investing, long-term horizon, dividend investing, portfolio strategy
Summary

B&G Foods is currently offering a dividend with a gigantic yield that is nearing 12%. This is a rare find in today's low yield environment.

However, there is trouble on two fronts. The company is struggling operationally. Meanwhile, the balance sheet is in horrible shape and is not poised to support the payout.

The company is committed to the dividend right now, but it's difficult to see a long-term turnaround without a dividend cut.

Investors are on the hunt for income producing assets in today's low yield environment that has 10-year US treasuries offering a paltry 1.79% to investors. These circumstances often push investors to look at defensive sectors, where dividend paying companies offer an alternative means of producing income. Packaged foods company B&G Foods (BGS) certainly fits the description, but unfortunately it gets complicated when you "look underneath the hood". The company's dividend currently yields an eye-popping 12% yield, but the dividend itself is poorly supported by troublesome operating metrics and horrific financials. In an update to our bearish call in February that has seen the stock shed 38% since publication, we are updating our coverage of a dividend that we feel strongly - will be cut.

Source: Seeking Alpha

The dividend is certainly appealing at face value. At $1.90 per share, the dividend is currently yielding almost 12% for investors. This is a significant increase in yield from our last coverage because the stock has seen a decrease in share price since then. This high yield is not only a fantastic rate of income generation, but these dividends can be pooled and reinvested elsewhere. However, investors need to be wary of the dubious circumstances surrounding the dividend. Our skepticism of the dividend's sustainability boils down to two main areas of concern.

Deteriorating Operational Performance

B&G Foods is currently having a hard time grappling with some sector wide headwinds. Like many packaged food companies, B&G Foods is seeing various input costs increase due to inflation, tariffs, and vegetable prices, among other factors.

Source: Ycharts

In addition to this, the company is continuing to struggle generating sales growth. Quarterly revenue growth has been negative on a Y/Y basis for the past four quarters. Management expects growth of continued operations moving forward to come in at 0%-2%.

Source: Ycharts

Now stagnant revenues by themselves are not completely unheard of. Top line struggles have actually popped up throughout the sector over the past few years as companies grapple with shifting consumer tastes and rising popularity of generic brands. However, when a business becomes less profitable, the lack of revenue growth begins to allow cash flow streams to shrink.

Source: Ycharts

Chart Note: Ycharts has yet to update their data for the most recent quarter. Cash from operations is only charted through nine months prior to the recent quarter. Cash from operations for the most recent quarter was $1.329 million.

This is troublesome on its own merit, but when we add context in how B&G Foods operates, it becomes increasingly worrisome. The company's two largest financial agendas over the long term have been the dividend payout and ongoing M&A to help drive top line growth. With a disrupted cash flow stream, these two priorities become more strenuous for the company's financials to withstand. At some point, something needs to give.

Balance Sheet On Borrowed Time

Investors need to hope that the company's recent operating performance turns itself around soon, because the company's financials are not set up to take the brunt of the dividend payout.

Source: Ycharts

Chart Note: Ycharts has not yet updated for most recent quarter for both Buybacks and Total Dividends Paid. Above chart illustrates prior nine months to the most recent quarter. Buybacks for the most recent quarter were approximately -$24.7 million. The total dividend obligation for the quarter was approximately $30.4 million, bringing the TTM figure to just over $121 million.

Currently, the dividend obligation of just over $121 million exceeds the company's trailing 12 months of FCF generated. Management's insistence on buying back stock only adds salt to this wound. While some companies try to pay out a dividend on an earnings basis, dividends are technically cash outlays. If FCF is insufficient, the balance sheet must be tapped in order to pay it out.

When we look at the balance sheet, we see some serious red flags. While the company currently holds $267 million in cash on hand, it's a bit of "fool's gold" that investors need to watch out for. The company's current cash hoard is thanks to its sale of Pirate Brands for $420 million. A year ago, the company's cash balance stood at a paltry $11 million. With the company's operational struggles, we don't see additional cash streams coming to replenish this cash hoard.

Source: Ycharts

Meanwhile, the company's leverage ratio stands at a horrific 9X EBITDA. The company recently refinanced its near-term obligations. While this buys management some time - the new debt was taken on with a higher interest rate than what it replaced. This comes across to us as extremely short sighted, and simply delays the "pain" of a balance sheet reckoning, rather than solving the existing problem.

Additionally, the company's many acquisitions over time have amassed a large pile of intangible and goodwill assets on the balance sheet. Of the company's total assets, approximately $2.2 billion (61%) are goodwill/intangible. Should the company continue to struggle, it could be forced to write a portion of this down, much like Kraft-Heinz (KHC) did recently. While this would be a non-cash event, such a write off would likely hurt the company's already rocky standing with creditors.

Source: B&G Foods, Inc.

With the company's credit already at sub-prime status, there simply is little to no wiggle room on this balance sheet for further stress.

Wrapping Up

The culmination of a number of factors, all point to a dividend payout that is starving the company of resources needed to right its ship. The company's stagnant revenues and pressured margins are limiting cash flows that are currently being consumed by the dividend. The company's current cash hoard is buying time, but the balance sheet is currently way overleveraged - regardless of its recent refinancing activity. The company needs an organic uptick in the business to turn this around, but unfortunately, we just don't see it. While management has already approved the dividend for next quarter, we don't see the payout as something that is responsibly sustainable.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.