I first recommended buying B&G Foods (NYSE:BGS) for its above-average dividend yield more than a decade ago, and 100 articles later, I am still writing about the company and its attractive dividend. B&G began paying dividends shortly after going public in 2004, and has paid a dividend each quarter. On May 2nd, the company will pay out its 16th consecutive $0.475 quarterly dividend, and based on the price of $27.27 when this article was submitted, the $1.90 annual dividend was yielding nearly 7%. Seeking Alpha rates that dividend yield an A+ compared to its peers, although it rates the safety (C-), growth (C-) and consistency (C) slightly below average.
In the past, the dividend growth had been fueled by accretive acquisitions that had averaged 1-2 per year. Interestingly, there were no acquisitions during 2021, and none thus far in 2022. Prior to 2021, the last period that the company failed to make acquisitions was 2008-2009. Even more interesting was a comment from the last earnings conference call about trimming the product portfolio.
To be clear, for most of B&G’s existence as a public company there simply weren’t any product divestitures. B&G’s Rickland purchase turned out to be a fad snack food, sales fell and the product was eventually discontinued. The only outright sale of a B&G brand was the divestiture of the Pirate’s in 2018 when an unsolicited $420 million offer came from Hershey. That offer was simply too good to turn down. It’s why this comment by recently hired CEO Kenneth Keller towards the close of the year-end earnings call was rather surprising:
…I think you should expect us to be a net acquirer versus exit, but we will selectively look at businesses that we don’t fit — that we don’t believe fit within the portfolio long term. And probably later this year, when we come back to you and talk to you more specifically about our strategies and our plans and how we want to manage the portfolio, we’ll be a lot more explicit about this. But the criteria for me would be looking at businesses that don’t really fit our operating model, don’t have a lot of synergies with how we run our businesses and where I don’t believe we have kind of the capabilities and the right to grow those businesses sustainably over time.
So I don’t want to go further than that, but it’s basically about shaping the portfolio to the places where I think we manage that well. We manage it well to get some growth. We manage it well to bring in acquisitions and similar business lines and categories and find synergies and build those and add to our capabilities. So we’ll look at selectively exiting some businesses that don’t fit that criteria, but — and then we’ll make some conscious choices about even business lines that might not look like they fit within kind of our focused portfolio structure where we can manage those businesses efficiently. I’m really going to look at only exiting businesses where I don’t think we could manage them efficiently or effectively within our structure.
Okay. So there’s a little bit more of a sense of streamlining than maybe previous managements have had. Is that at least a fair point, and I’m not trying to put words in your mouth, I’m just…
No. I said we are going to be a net acquirer, which means, I think — but we will look at some…. Yes. But we will look at some places that we can prune the portfolio where I think it’s not the best fit with where we want to go. But look, net, I think we’re going to be acquiring more than we’re going to be divesting.
It remains to be seen whether investors will get additional insights into where the portfolio might be “pruned” when the company hosts its Q1 conference call after the market closes on Thursday, May 5, 2022. A more important issue for investors is likely to be about inflationary pressures and whether the company has sufficient pricing power to recover its increased costs for labor, transportation, packaging, and commodities. These issues were raised several times during the year end call:
[Keller]:…Inflation in full year 2021 was in the mid-single digits, with the second half increasing to a double-digit increase across the portfolio. Crisco input cost inflation is significantly higher than the base portfolio given the major increases in soybean and canola oil. We anticipate the substantial inflation will continue well into 2022 and at a minimum through the first half, particularly with the impact of the war in Ukraine.
How bad was the inflationary impact on Crisco? Elsewhere during the conference call, CFO Bruce Wacha had this to say:
Our best-performing large brand in 2021 was Crisco. Crisco generated approximately $293.4 million in net sales for fiscal 2021, far outpacing our expectations for the business of $270 million in net sales when we acquired it in late 2020. As a reminder, we built our forecast for Crisco prior to the rapid input cost inflation that we experienced for soybean oil, which at a peak, reached pricing levels of more than 100% greater than we had announced the acquisition of the business in late 2020.
Soybean oil inflation hasn’t been the only challenge faced by B&G. Those following the Russian invasion of Ukraine are most likely aware that Russia (number one) and Ukraine (number five) had been two of the largest exporters of wheat in the world. A recent report by CNBC began with the following three key points:
- The war in Ukraine is putting a massive strain on the global food supply.
- Food prices are rising at historic rates, while prices for commodities like wheat and corn are at their highest levels in a decade.
- Despite those factors, experts don’t expect food shortages to occur in the United States.
So, while there might not be shortages, the cost pressures are certainly going to be a significant challenge facing B&G and its customers. Cream of Wheat, one of the company’s top ten brands, along with Mama Mary’s, uses wheat, and Green Giant (its largest brand), and Ortega (its fourth largest brand) use corn. Assuming that the company will pass along these cost increases, will potential customers turn to lower priced store brands and other generic alternatives to save money?
And canola isn’t the only oil taking a bite out of consumers’ budgets. Anyone that has purchased gas since the Russian invasion of Ukraine is likely to have also noticed the price increases at the local gas station. A recent article titled “Record gas prices hit working class Americans with inflation already surging” notes that the hit to the average consumer would be ~$400/year, and included the following:
The average price of gas in the U.S. is now a record $4.32 per gallon. In some places it’s much higher. That’s getting painful for people on modest incomes, especially if they have long commutes or need to drive a lot. …
“It’s scary,” says Renea Paige at another gas pump. “You do cringe because it’s like, OK, the meat prices are so high, do I cut back on that and get something different?” she asks. “I feed a family. It’s like eight of us, so yeah, it can be very difficult.”
The article also included several other points:
- The rising prices will disproportionately impact the poor.
- It’s a “once in a lifetime” event, with the size of the various increases not having been seen since the 1970’s [and, yes, I lived through that period, which also included supply shortages and long lines at the gas pump].
- Key differences today show that the United States is less dependent on oil. Not only are cars more fuel efficient, but less oil is also being used for heating homes and generating electricity.
Still, the price of gas is also a much more noticeable reminder of inflation with large signs regularly showing prices above $4 per gallon – a frequent reminder to many consumers. And, not only will it make a dent in the disposable income of certain consumers, but it will also drive up B&G’s shipping costs.
Inflation And The Bottom Line
The following portion of the Q4 call highlights some of the inflation issues facing B&G, several of which have been bolded due to their impact on 2022:
During fiscal 2021, gross profit was negatively impacted by higher-than-expected input cost inflation, which were, in many cases, higher in the fourth quarter of 2021 than they were in the fourth quarter of 2020. Our expectation is that input cost inflation will continue to have a significant industry-wide impact during fiscal 2022.
We have been able to mitigate a portion of the impact of inflation by locking in prices through short-term supply contracts and advanced commodity purchases agreements and by implementing cost-saving measures. We have also announced list price increases and optimize trade for certain products where it makes sense. However, increases in the prices that we charge our customers generally lag behind the rising input costs. As such, we were unable to fully offset all of the incremental costs that we faced in fiscal 2021, and we were not able to fully offset all of the costs that we will face in fiscal 2022.
Adjusted EBITDA as a percentage of net sales was 17.4% for fiscal 2021 compared to 18.4% in fiscal 2020. Margins were negatively impacted by the input cost inflation and the negative impact of absorption on reduced volumes. That was only partially offset in fiscal ’21 by our cost savings initiatives and pricing initiatives.
Interest expense was $106.9 million for fiscal 2021 compared to $101.6 million in fiscal 2020. The increase in interest expense was primarily driven by an increase in average debt outstanding as a result of the Crisco acquisition, which was offset in part by a lower cost of debt as well as 1 fewer reporting week. …
Our fourth quarter is typically our strongest cash flow quarter of the year, and this was true again in the fiscal 2021. This, coupled with the net proceeds we received from shares that we sold under our ATM equity offering in the fourth quarter, allowed us to reduce our net leverage as defined in our credit agreement to approximately 6.1x.
And while forecasting in the current environment remains challenging, I will now walk you through our outlook for 2022 although perhaps with wider ranges and more caveats than we were accustomed to in pre-pandemic years due to the uncertainty around COVID and other potential new variants, continued inflation, which may be offset perhaps by potential relief in the second half of the year, and by continued supply chain disruptions.
Based on what we know today, we expect net sales of $2.070 billion to $2.125 billion in fiscal 2022, representing a growth rate of nearly 1% to a little bit more than 3%, which is just ahead of our historical 0% to 2% growth plan. We expect net sales growth in fiscal 2022 to be primarily driven by our pricing initiatives, inclusive of full year benefits of various pricing initiatives that we launched in fiscal 2021 and coupled with additional pricing initiatives in 2022, including price increases that have already been announced and price increases that we expect to announce later this year.
I found the last paragraph quite puzzling. Based on what we know about the expected level of inflation, sales increases of “1% to a little bit more than 3%” would seem to be too low to absorb expected increases in input costs. Also note that the last paragraph makes no mention of new product introductions. Recent previous calls had discussed new product “innovations” and how the supply chain issues and certain product shortages had delayed new introductions. One has to wonder about what appears to be a glaring omission. And that’s not the only uncertainty facing investors.
Supply chain issues are unlikely to suddenly be resolved, and should result in higher input costs. Will B&G be able to recover these costs without materially damaging sales? As higher fuel prices continue to eat into consumers’ budgets, will customers of B&G products trade down to lower priced store brands? And, if so, to what degree? I believe that B&G will be able to absorb and/or recover these cost increases without cutting its attractive dividend payout, but the concern about a potential dividend cut put a damper on future stock price appreciation.
Disclosures and Rating
Seeking Alpha requires contributors to give one of five ratings on stocks discussed in their articles, ranging from Strong Buy to Strong Sell. To be perfectly clear, B&G is our third largest equity holding, although slightly more than a quarter of that is a pure trading position with $30 short duration covered calls written against it. As to the rest of those B&G shares, a portion of the dividends are currently being used to fund mandatory IRA withdrawals, while we are currently re-investing dividends on the remaining shares.
I clearly bring a certain bias when selecting a rating. The above-average dividend yield is enough of an incentive to earn a rating between Hold and Buy. For an outright Buy, I would like to see an expected total return of at least 15%. That may be a stretch, but since there is no option for a “Weak Buy”, I have chosen to rate it a Buy.