B&G Foods Gains 23% Following Earnings & Yield Still In Double Digits - Part 1

Mar. 01, 2020 3:41 PM ETB&G Foods, Inc. (BGS)48 Comments

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Summary

B&G Foods has a dividend yield in the low to mid-teens.
Management once again reiterated commitment to the dividend.
2020 cash generation guidance supports the current dividend.

Introduction

It has been years since I have written a multi-part article, and I had not planned on this being one. However, the volatility of both the shares of B&G Foods (NYSE:BGS) and the entire market had started to make this particular article much too long - the word count quickly went above 2000 - and I have decided the reader would be better served to break it down into two parts. The first will focus on my disclosures, the price of B&G, the safety of its dividend and a high level look at the company guidance for 2020. The second will focus much more on the 2019 results and some of the interesting plans for the individual products.

For those less familiar with the company, it manufactures and sells many well-known packaged food brands, including Green Giant, Ortega, Cream of Wheat, Mrs. Dash and Back to Nature. Its strategy has been to acquire "orphan" brands with high EBITDA margins from other companies, tweak the products by adding flavors, refreshing the packaging and introducing smaller sizes to sell into dollar stores. Originally, everything was "center of the store" shelf-stable food items, although in the past seven years it has added non-food items like Static Guard, a refrigerated margarine product and Green Giant frozen foods. In late 2018 it sold its Pirates Booty brand to Hershey (HSY), it's only divestiture since going public.

Since late 2007 B&G has been a core component of my income portfolio. I was initially attracted to the blended security (comprised of one share of stock with an $0.85 annual dividend and one 12% Note) by its above average yield, but it was the repeated statements by management and the board about its commitment to the dividend that were the major contributing factors to my initial purchase decision. The Note was subsequently called for early redemption and I continued to hold the shares and reinvest the dividends, a dividend that would be cut to $0.68 by the end of 2008. That initial position was eventually sold when covered calls that had been written against a portion of the position were exercised in early 2011, and ever since I have continued to trade and invest in the stock and write covered calls. 2011 also marked the year I began writing articles for Seeking Alpha, including my initial article on B&G. Another 90 articles on B&G have been written since I first mentioned the stock.

The price of the stock during the time I've owned shares has seen a low of $2.54 in the Fall of 2008 and a high of $52.84 in the Summer of 2016. And, no, I never bought at that bottom, nor did I ever sell at more than $50. While the price range this past week has been nowhere close to that spread, it has been quite volatile.

On Monday, February 24th, the share price dipped below $13 to $12.97, a price not seen since late 2010 when the annual dividend was $0.68. The dividend has since increased to $1.90 and as the price fell below $13 the yield was closing in on an eye-popping 15%!

The share price has been under relentless pressure as the market has refused to accept the idea that the company can continue its current strategy and still generate enough cash to maintain the dividend while pursuing accretive acquisitions. Short interest has remained at more than 40% of the float, and my brokerage account continues to list the shares as hard-to-borrow. The market, and many of the Seeking Alpha's contributors and sell side analysts that have published bearish articles and reports on the company, believe the dividend cannot be maintained at its current level, if at all.

I have regularly disagreed in comments on those bearish articles as well as those who posted similar comments on my bullish articles, but at times it felt as though I was tilting at windmills. Did I have too much faith in management's statements about the dividend? On its conference calls, it repeatedly stressed that there was sufficient cash to pay the dividend and its SEC filings regularly emphasized its commitment to an investor friendly dividend policy. Still, could all those bears and short sellers (sometimes referred to as the smart money) be correct? Did the company have a miserable Q4 and was the dividend about to be cut? Was the market correct when it pushed the price down to its lowest point in almost a decade, and most importantly, was I wrong to once again load up on B&G as it headed into earnings?

Some of that fear had been allayed when the company issued a brief press after the market closed on Monday stating that the:

...Board of Directors has declared a regular quarterly cash dividend of $0.475 per share of common stock. The dividend is payable on April 30, 2020 to shareholders of record as of March 31, 2020.

I had thought that the dividend being maintained would be enough of an indication that the company was going to have a decent report and issue reassuring guidance. Apparently the bears weren't about to let that deter them, and the share price touched another new decade long low of $12.70 shortly before the company would hold its conference call Tuesday afternoon. Even after the call and the positive reassurances by management on Tuesday, the after-hours market gave little indication of what would occur on Wednesday. The shares opened at $14.06 and reached a high of $15.99 before closing at $15.75, a gain of more than 23%! On Thursday the shares would give a large part of that gain back, closing the day at $14.28, only a few cents off its lows of the session.

Additional Disclosures

Before diving into the results and the forecast I want to make my disclosures very clear. Prior to earnings being released and the subsequent conference call I had added A LOT of shares, just as I had before the Q3 call. Whether I have simply been very fortunate, or too trusting in management statements and cash flow projections, or foolish or... Take your pick. The point is that I had, and still have, a very large position and it probably adds some degree of bias to my objectivity or lack thereof.

With recent purchases, my B&G position had swollen to almost a third of my holdings. I believed, and still do, that the shorts are irrationally pushing the price down, and like a coiled spring, the price was going to move higher once they could no longer maintain that pressure. We saw some of that occurring on Wednesday (February 26th), and I took the opportunity to sell off some of my trading positions and write in-the-money April covered calls against another portion. My objective is to eventually reduce my exposure to B&G and bring it back down to a targeted allocation of 5%-6% of my equity investments.

To get to that level my current intentions are to make additional outright sales and/or write additional April covered calls with strike prices of $15 or $17.50. Adding a layer of complexity is the $0.475 dividend that was recently declared and how that might impact the total return over the next month. It is also unlikely that I will be following a straight path to get to that target and that I will continue to make several short term trades. In fact, on Thursday I bought back some of the calls I had written on Wednesday. I also placed a limit purchase order that didn't get filled.

The elephant in the room, or the obvious question, is "If you are so bullish on the stock, why won't you just hold until it gets back to at least $20?" The answers are a combination of reasons and probably won't be satisfying to either the longs or the shorts. For instance, there's the famous John Maynard Keynes quote, "The market can stay irrational longer than you can stay solvent." Then there are the two opposing emotions that enter into many investment decisions, Fear vs. Greed. Or there is that cliche about trying to catch a falling knife.

Perhaps the simplest answer is that when I started establishing trading positions in the mid-teens, I never envisioned the price cratering below $14, let alone below $13. Nor did I envision that a virus that began in a fish market in a Chinese city of 11 million people that many in the world had never heard of could wreak havoc on world markets. Any of these can shake one's confidence. And, with that, a closer look at the dividend, the recent conference call and B&G's results.

Commitment to the Dividend

A month ago I had this exchange in the comments section of a bearish article by @Dividend Power titled B&G Foods: 12%+ Yield, But A Dividend Cut Is Inevitable. @myiowahome had commented:

...A consumer name should not have a dividend this high and doesn't need one! Look at GIS, CAG, K, HSY, etc ad infinitum.

I replied:

Why not throw PEP in that list? BGS competes with Pepsi's Quaker, Stacy's and Tostitos salsa brands. The issue is not that the dividend is too high, but that the stock price is too low.

Some would say it was a snide remark, so I was surprised to see Romanzi echo a similar sentiment on the conference call. With many of the bears basing their case on the "necessity" of a dividend cut, the bears couldn't have been too happy to hear CEO Ken Romanzi statements about the dividend or listening to CFO Bruce Wacha explain how the cash to pay that dividend would be generated. As to Romanzi:

So stepping back, the elephant in the room and the question everybody asking is, why is our stock so low?...

He then went on to talk about Q4 disappointments, high leverage, the the fear of a dividend cut. While Q4 disappointments add to volatility, and leverage can be brought down in several ways, the sustainability of the dividend is the one that I care about most. As long as the company can keep paying it, the share price will eventually take care of itself. Romanzi added:

we have no plans to cut the dividend under our current operating model and assumptions. We continue to believe in the dividend because that is the vehicle upon which this company was built. We also believe that under normal operating conditions, we generate enough cash flow to cover the dividend. However, as you’ll see from our net cash from operations in 2019 and as Bruce will discuss in more detail, we had several onetime uses of cash in 2019, including a very sizable tax bill related to a gain on sale from the sale of Pirate Brands, share repurchases and investments in working capital that increased our debt. But we do not see these same uses of cash continuing in 2020, and Bruce will share our cash flow plan that should give you the confidence in our dividend as we.

Wacha marched through the cash flow guidance for 2020 during his prepared remarks:

We expect adjusted EBITDA of $302.5 million to $312.5 million; adjusted earnings per share of $0.60 to $0.80; a cash working capital benefit of approximately $35 million to $45 million; net interest expense of $98 million to $103 million, including cash interest expense of $94 million to $99 million and interest amortization expense of $3.5 million; depreciation expense of approximately $45 million; amortization expense of approximately $19 million; an effective tax rate of approximately 25% to 26%; cash taxes of approximately $10 million to $20 million; and finally, we anticipate CapEx to be approximately $40 million to $45 million in fiscal 2020, which is slightly below last year.

Based on the midpoint of our adjusted EBITDA guidance range, we expect that our adjusted EBITDA, less CapEx, cash taxes and cash interest, will be approximately $150 million to $155 million. We also expect to see an additional $35 million to $45 million cash benefit from an anticipated reduction in working capital, taking this number closer to $185 million to $200 million, which should leave us with a reasonable cushion from which to pay our annual dividend of approximately $122 million.

However, it was an exchange with an analyst where Wacha's response was similar to my repose above:

[Analyst] Rob Dickerson - Fair enough. And then just quickly on the dividend. You stated upfront, there are three issues that probably pressured the stock, one of them you caught out with the dividend. So, I’m just curious, you said in the prepared remarks, not trimming the dividend because that’s kind of how the company was built, which I understand to an extent. But then I also have to ask, why not allocate more to capital – more capital to acquisitions? And kind of just trying to understand a little bit better, just the process behind the capital allocation strategy, given your dividend yield is materially higher than the highest next to you within this space. That’s all. Thanks.

Wacha - Sure. And I think the Board and the management team, Ken and I included, have had a consistent view on this, and we went public on the idea of returning excess cash to shareholders. We view the dividend policy based on our cash generation and the cash generation is here with the company. We do think the yield doesn’t make a lot of sense, but we never set the dividend policy based on yield. It’s been more a function of the cash flows. And our view just the dividend yield doesn’t make sense because the stock price doesn’t make sense.

Summary - Part 1

If the investor, or potential investor, accepts management's guidance and view, there is no need to cut the dividend. Perhaps equally important is that this will be Romanzi's first full year as CEO and he owns this 2020 guidance. That makes me think this is conservative guidance and that the dividend will remain safe for 2020. And, if the dividend remains safe, the share price will take care of itself.

This article was written by

Summary

Introduction

Additional Disclosures

Commitment to the Dividend

Summary - Part 1

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