I published an article in late October of 2019, titled “B&G Foods Nears 12% Dividend Yield – Are Investors Getting Spooked?“, as I was preparing for an onslaught of neighborhood kids yelling “Trick-or-Treat”. Halloween was a scary time for B&G investors. Eight months later it’s a far different situation for the company, investors and authors on Seeking Alpha. The share price has moved up considerably, and the yield has dropped from double digits to a far less gaudy figure – less than 8%.
In the past 18 months, there were a number of articles written by Seeking Alpha contributors not named Crunching Numbers banging the drum about the risks of owning this stock and the likelihood of a dividend cut. Here are some of those titles, along with the author rating:
- Risks Beginning To Mount In B&G Foods (Neutral)
- B&G Foods: Clock Is Ticking (Neutral)
- B&G Foods: 12%+ Yield, But A Dividend Cut Is Inevitable (Very Bearish)
- B&G Foods: Dividend Cut Very Likely (Bearish)
- B&G Foods: A Pea Could Crush The Dividend (Neutral)
- B&G Foods And Its Dividend Could Turn Stale (Bearish)
- B&G Foods: The Ultimate Yield Trap (Bearish)
- Gauging The Safety Of B&G Foods’ 10% Dividend (Bearish)
- B&G Foods And Its Real Value (Bearish)
- I Don’t Have The Risk Appetite For B&G Foods (Neutral)
- B&G Foods: Rough Times Again (Neutral)
- B&G Foods: 7.7% Yield, But Will The Dividend Be Cut? (Very Bearish)
- B&G Foods, Inc.: How Safe Is The 7% Dividend? (Bearish)
Have you noticed that even the neutral ratings have a negative tone? Well, the “likely” or “inevitable” dividend cut hasn’t occurred, nor did the dividend get crushed by a pea. Those of you who have followed my articles know that I am a big fan of the company’s generous dividend policy and B&G’s commitment to the idea that investors are best served when a large portion of the company’s free cash flow is returned to shareholders in the form of dividends. It is the main reason I first invested in the company, and it is the main reason it is still a significant holding of mine.
Unfortunately, that commitment to the dividend didn’t stop the fears surrounding COVID-19, or the decline in the share price from $17.93 at the end of last year to an intraday low of $10.39 on March 12th. While Halloween was a scary time for B&G investors, COVID-19 fears were far worse until the market realized that Stay-At-Home orders would benefit consumer-targeted packaged food companies. That realization didn’t take long, with the share price exceeding $18 within a week. It would keep climbing until it topped out at $26.39 on June 8th and has remained in the mid-$20s since then, closing at $24.35 heading into the July 4th holiday weekend. That’s a gain of 134% off the lows back in March!
Many of those writers on Seeking Alpha were on the same side of the call as a lot of the Wall Street analysts who followed the company. The Street analysts were also wondering about the sustainability of the dividend, questioning management about the high leverage ratio, cash burn rate, and debt levels.
What about all those worries surrounding the sustainability of the dividend? Well, B&G has paid a dividend every quarter since going public in 2004, and it wasn’t about to stop. That dividend started at an annual rate of $0.85 per year. It was cut at the height of the Great Recession to $0.68 and eventually raised to $1.90. It has paid a $0.475 quarterly dividend for eight consecutive quarters, and those lucky enough to have held the shares on June 30, will get the 9th consecutive dividend at that rate on July 30th. There’s nothing like a pandemic, along with a variety of government stimulus checks, to help boost revenues and raise the share price.
How big a boost? Looking ahead, we know that when Q2 results are reported, the company will report record revenue results. On June 3rd, the company issued a press release noting:
Net Sales (vs. prior year fiscal May and prior year first two months of second quarter, as applicable)
- Net sales for fiscal May 2020 (the second month of B&G Foods’ second quarter) were $160.1 million, an increase of $53.7 million or 50.5%.
- Net sales for the first two months of the second quarter of 2020 were $349.0 million, an increase of $127.5 million or 57.6%….
… the Company expects net sales growth for fiscal June 2020 to be above historical levels but more modest than net sales growth for the first two months of the second quarter. The Company expects net sales for the second quarter of 2020 to be in the range of $510 million to $525 million.
To put things in some perspective, last year the company generated Q2 net sales of $371.2 million, down from $388.4 million in fiscal 2018. The 2019 sales decline was largely due to the sale of its Pirate brand in late 2018, a brand that generated more than $25 million in Q2 2018. That sale was partially offset by the subsequent acquisitions of the Clabber Girl and McCann’s brands. Regardless, by any measure, more than half a billion dollars of net sales in Q2 of 2020 will be a blowout quarter. And, for those interested, the year-over-year revenue gain at $510 million is 37.3%, and at $525 million, the gain is 41.4%.
It seems obvious that much of the gain was fueled by panic buying and stocking the family cupboards. It also seems obvious and that those gains won’t be maintained. On a going forward basis, the following was probably more important.
There was a news brief on Seeking Alpha titled “Packaged food companies expected to see strong sales continue” dated June 30th:
A recent survey by Piper Sandler indicates a sustainable lift for food-at-home sales of perhaps 15% or more.
Analyst Michael Lavery says two-thirds of respondents said they are likely to continue to eat more at home, even in a post-pandemic world. The percentage was just slightly lower than the level from April and May.
While the ongoing “lift for food-at-home sales of perhaps 15% or more” is very encouraging, it’s important to remember that B&G also has sales to the food service sector, sales that would obviously be negatively impacted as restaurants were closed and businesses with corporate cafeterias shut down. The food service sales are often at lower margins and represent a relatively small portion of the company’s business. On balance, I predict B&G sales will continue to benefit from consumers eating more meals prepared at home, and that this will continue through the end of the year. I also firmly believe that the relatively new CEO, Ken Romanzi, has once again low-balled guidance since he wants to be absolutely certain that he will beat guidance.
Several other questions remain. What we don’t know is the mix of sales in the quarter and their average margin, or how much of these extra sales will subsequently turn into free cash flow. We don’t know how much COVID-19 has impacted many of the input costs. For instance, increased sales also indicates increased transportation costs. However, larger volumes typically mean fuller trucks and greater efficiency in transportation. Plus, we can see that the cost of diesel fuel, a key component in transportation, has been significantly lower than a year ago.
Less clear is the impact on food production costs, although they probably rose. What company management did address during the Q1 earnings call was some of the increased costs as a result of COVID-19 employee protection measures.
During this crisis, every single decision we make is guided by our following priorities. First and foremost, protecting the health and safety of our employees, assuring our usual high level of quality and integrity of our products, meeting unprecedented customer and consumer demand, helping our communities, and lastly, making the right decisions and investments to ensure the long-term financial health and success of B&G Foods when we emerge from this pandemic.
… screening of all employees, including temperature checks before entering our manufacturing facilities; enhanced sanitation procedures at all of our manufacturing and other work locations; social distancing at all manufacturing locations, including the required wearing of masks, the installation of plexiglass safety shield barriers at spots where line workers must work in close proximity; the staggering of shift times and [breaks]; the restructuring of break rooms, … the installation of plexiglass safety shield barriers at each table to maintain proper employee separations; quarantine for at least 14 days with pay of all employees who have either been exposed to COVID-19 or who are exhibiting any symptoms of COVID-19; the notification of manufacturing employees of any COVID-19 positive tests at their location and the quarantine for at least 14 days with pay any employee who may have had contact with the employee who tested positive; manufacturing plant shutdowns for thorough sanitation upon any COVID-19 positive test with continued pay for employees; and instituting a work-from-home policy for office workers beginning March 16 and as of this date in the [until] at least June 1, 2020.
During the Q&A portion of the call, an analyst asked for details about the costs to implement these measures:
…did you give a dollar amount of the incremental costs related to the COVID-19 situation in the quarter? And how much of these would you consider non-recurring? Some of these costs like the incentives, they sound like they’re one-time in nature, but which of these new costs are maybe a little bit stickier as we think about employee screenings and protective equipment. How should we think about those costs in Q2, assuming they would be higher than they were in Q1 and maybe beyond in the rest of the year? Thanks.
CFO Bruce Wacha’s response:
Less than $1 million in Q1, and the cost will probably continue so long as we’re in the current environment that we are in. And as that environment begins to recede, I think those costs will start to normalize.
The answer was particularly vague, especially for anyone trying to forecast the incremental ongoing costs. I make this statement based on the assumption that the measures taken in Q1 probably occurred very late in the quarter. This is partly based on the statement about “instituting a work-from-home policy for office workers beginning March 16” and partly based on the fact that New Jersey, the home to the company’s headquarters and certain of its production facilities, didn’t issue stay-at-home orders until even later in March. There is little reason to assume that B&G initiated any of the measures earlier than March. More difficult to ascertain is the impact of the virus on its large facility in Mexico where cauliflower – a key ingredient in many of its products – is grown and frozen.
On the positive side, I certainly expect to see that a significant amount of the extra cash generated from the increased sales will be used to reduce the company’s leverage as it pays down all or part of the revolver, which stood at $100 million at the end of Q1. Whether it has also been able to pay down part of its Tranche B term loans (nearly half a billion dollars at the end of Q1) due 2026 remains to be seen. And, of course, how much more of its debt will it be able to pay down over the remainder of the year.
Unfortunately, we are unlikely to get any more information prior to early August when the company should issue its Q2 results. In the meantime, while many of us won’t have access to the typical explosions of fireworks on the 4th of July, we can enjoy the explosive growth in Q2 revenues at B&G Foods. And, of course, there’s that explosive rally in the share price since the March 12th low and the gain of 36% in the share price since the end of last year.
Enjoy the dividend, maintain safe social distancing, wear a mask, and have a happy 4th of July!
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 reinvest dividends on most of my BGS holdings and also have out of the money covered calls written against a portion of my BGS holdings. In the past I have engaged in frequent trading of the shares, and I may do so at any time in the future. have often trade additional shares