B&G Foods Nears 12% Dividend Yield - Are Investors Getting Spooked?
Oct. 30, 2019
1:49 AM ET
I would say "heck yes". A dividend cut seems already more than half baked in to the PPS. Almost seems impossible for it not to happen. Yet like an amateur, I am still holding.
Meanwhile, the article's conclusion is different.
Summary
Recent prices below $16 push yield to multi-year high.
Earnings to be reported after the bell on Thursday.
Expect to see the next dividend declared within the next two weeks.
It's clear that the market has decided that B&G Foods (BGS) will be cutting its dividend. Last week the stock hit a low of $15.72, briefly pushing the yield above 12%. On Friday, the stock closed at $15.94, pushing the yield of its $1.90 dividend up to 11.92%. In fact, last week the price dipped below $16 on three of the five days, although Friday was the first time the stock closed below $16 since early 2011. On Monday of this week the stock hit another 8-year low, closing at $15.40 (down 3.4%), pushing the dividend yield up to 12.34%.
One could easily argue that the short sellers are in control. Barron's reports the short interest as of October 15th as being 28.1 million shares, up 1.53% from the prior period, and an enormous 41.01% of the float. (I believe the percentage is even higher, and the recent share buyback has not been taken into account.)
Are the market and the short sellers correct? In early 2011, the dividend was $0.68 per share vs. the $1.90 per share we see today. In late 2008, one could purchase shares for $2.54 (its all-time low) when the stock was paying an $0.85 dividend, and the yield was more than 33%. Within months, that dividend would be cut to $0.68, and the dividend has been rising at irregular intervals since then.
If history is a guide, the board won't declare the next quarterly dividend until a few days after the Q3 earnings have been announced. The Q3 earnings announcement is scheduled to take place after the market closes on October 31, which is also Halloween, one of my favorite holidays.
Disclosures
I want to be very clear about my investing and trading in B&G so that readers can use this information to form their own opinions about any bias that may exist in this article. I have multiple positions in several of my family's accounts, and I consider B&G to be a core, long-term, dividend producing investment in most of these accounts. In fact, I have owned positions in B&G for more than a decade and first discussed the stock on Seeking Alpha on June 14 of 2011. Within a week it had risen more than 15%, causing me to rescind my outright buy and instead recommend a covered call strategy to
provide some downside protection on the share price and could provide a much more attractive return. And for those unwilling to engage in a call writing strategy, it is probably more advantageous to wait for a pullback in the share price.
Within a week the pullback had occurred. It wasn't the only time that I had become less bullish on the company, and while I am basically a buy-and-hold type of investor, I also believe in the benefit of asset allocation. As such, I have not been reluctant to take profits if a position becomes too large a portion of my dividend producing assets.
I have written more than 80 articles on B&G since those early articles in mid-2011. Most were bullish and focused on the dividend yield, although when the yield dropped below 5% I would pare back my holdings. More recently, as the stock has declined, I have been very bullish on the company. Shortly before the Q2 earnings were announced, I took a significant trading position, selling after a pop in the share price when the earnings were announced. More importantly for those reading, I have been very actively trading the stock around my core dividend holding over the past three months. In some cases it has been pure day-trading, in other cases it was a covered call strategy combined with dividend capture, and in others it has involved writing near-term calls on trading positions.
In addition to my core holding, I currently hold one large trading position with the November $17.50 covered calls, and three other medium sized trading positions where I may or may not sell covered calls at any time. How active is my trading? More than three dozen trades in the past three months, including one round trip on Friday and two new positions on Monday. I also expect to open and/or close additional positions before the company releases earnings after the bell on Thursday.
And last, but certainly not least, B&G currently makes up more than 16% of my current equity holdings, well above my ~5% target allocation. I expect to trim this back towards 5% as my trading positions are unwound.
Will Halloween be scary for B&G investors?
It's unlikely that I will get a chance to listen to the full call as I expect there to be interruptions from Trick-or-Treaters ringing our doorbell. No doubt some of those kids will be wearing what they think are scary costumes. Will management make statements in the earnings announcement or during the subsequent conference call that will prove to be more frightening than my Trick-or-Treat visitors? As investors, the big questions on Halloween are whether B&G will be issuing results or updated guidance that
scare those investors that are long the stock,
scare those traders that have taken short positions,
simply re-affirm guidance,
and, most importantly, announce any changes to the dividend.
I'm expecting that the news will be far better than the market expects, and I don't expect a change in the dividend rate.
The Dividend
The company repeatedly emphasizes its dividend policy. Its 10Q notes:
Our dividend policy reflects a basic judgment that our stockholders are better served when we distribute a substantial portion of our cash available to pay dividends to them instead of retaining it in our business. Under this policy, a substantial portion of the cash generated by our company in excess of operating needs, interest and principal payments on indebtedness, capital expenditures sufficient to maintain our properties and other assets is distributed as regular quarterly cash dividends to the holders of our common stock and not retained by us. We have paid dividends every quarter since our initial public offering in October 2004.
On the last conference call, company management included the following in its prepared remarks:
We also continued to maintain our longstanding commitment to our dividend policy. Earlier this week, our Board of Directors demonstrated this by declaring our 60th consecutive quarterly dividend since our 2004 IPO. Since the IPO, we have returned to our stockholders almost $900 million in the form of dividend. ...
... In summary, we believe that B&G Foods' business plan remains intact and very attractive. As we continue to [run a] lean but nimble organization that can react quickly to various industry challenges, such as widespread inflationary pressure; while we also create value through accretive M&A; while simultaneously returning excess cash to our investors through a healthier dividend; and share repurchases from time-to-time.
And, later on during the Q&A on that call, management responded to a question about the dividend and cash flow:
Dividend -- we're still committed to the dividend. Ken referenced on the call the longstanding commitment to the dividend. As people saw yesterday, our board reauthorized the dividend at the same level, and so pretty comfortable with that. And as far as the dividend coverage, based on the range of $305 million to $320 million for adjusted EBITDA, you're getting to $175 million, $180 million of EBITDA less cash interest, cash taxes and CapEx, to cover dividend of about $125 million.
Since then, the company made a number of moves that would impact the coverage of the dividend. It repurchased at least 1,180,093 shares of common stock for an average price of $18.71 per share, or $22.1 million, through August 31. That repurchase would result in annualized dividend savings of $2,242,177. That after-tax savings would be offset by an increase in debt. Since the cost of borrowing would be at ~5.25%, there would be a pre-tax increase of $1.16 million in annual interest expense, but the company should be in better shape to cover the dividend.
Note: Since the end of Q2 the company refinanced its $750 million 4.625% notes due in 2020. This was done in two separate transactions. The first was a $550 million 5.25% Senior Note and the second was with additional borrowings of a $450.0 million tranche B term loan facility under B&G Foods’ existing senior secured credit facility. This second loan is at a variable rate of LIBOR plus 2.50%. The current one-year LIBOR rate is 1.99%.
These two transactions should provide additional flexibility for B&G, but it would also change the dividend coverage figures stated by CFO Bruce Wacha during the Q2 call. However, the liquidity provided by the recent debt moves should also allow B&G to pursue additional acquisitions, continue buying back shares and continue to fund its generous dividend.
Q4 at B&G
We are all familiar with the term Black Friday. It's currently used to mark the day after Thanksgiving although it dates back to
the crash of the U.S. gold market on September 24, 1869. Two notoriously ruthless Wall Street financiers, Jay Gould and Jim Fisk, worked together to buy up as much as they could of the nation’s gold, hoping to drive the price sky-high and sell it for astonishing profits. On that Friday in September, the conspiracy finally unraveled, sending the stock market into free-fall and bankrupting everyone from Wall Street barons to farmers.
A century later, the term referred to the high number of traffic fatalities on the day after Thanksgiving. More recently, the term refers to the sales that kick off the holiday shopping, and a date when retailers would go into the black for the year. While B&G does not run Black Friday specials, the Thanksgiving, Christmas and New Year's festivities help make Q4 the company's largest revenue-producing quarter.
So, when B&G reports results, it will already be one month into Q4 and management should have a decent indication about how well the fourth quarter is going to turn out. It will find out how well its new Green Giant "innovation" products are being received and whether the rest of the product line is holding up. If guidance is reaffirmed, I would expect to see the stock move higher. I would also like to see the company comment about the dividend in the earnings release or during the conference call as it did when Q2 was reported.
Unfortunately, based upon the last few years, a dividend announcement seems unlikely to occur. The Q4 dividend announcements in recent years have been made a few days after the earnings were released, even when the company had a dividend increase in Q4. (Note that the Q4 dividend announcements in early November would be for the payment made at the end of January 2020 for shareholders of record at year-end 2019.)
Summary
B&G has been heavily shorted for months, and my Schwab trading platform consistently shows the stock as "Hard to Borrow." The recent downward moves in the share price suggest that the latest two-week period continued to show heavy shorting.
More importantly, it appears as though the shorts are betting on a dividend cut. I'm choosing to believe management's statements about the dividend coverage and that the recent re-financing moves buy the company more time to shore up the balance sheet.
Then again, my positive outlook could just be some of that bias creeping into the article.
[Author's Update, 4:00 AM, October 30: After this article was submitted and published @steelworker2004 pointed out that the company issued a press release at 8:13 PM Eastern Daylight Time announcing that:
its Board of Directors has declared a regular quarterly cash dividend of $0.475 per share of common stock. The dividend is payable on January 30, 2020 to shareholders of record as of December 31, 2019.
At the closing market price of the common stock on October 29, 2019, the current dividend rate represents an annualized yield of 12.1%. This is the 61st consecutive quarterly dividend declared by the Board of Directors since B&G Foods’ initial public offering in October 2004.
Since the announcement was made after both the regular and extended hours trading sessions had closed, I expect that this press release will result in a pre-market rally that carries through to the regular session. This is a departure from the last few years, but it is certainly welcome news for Longs and should be bad news for the Shorts. I expect to be selling some of my trading positions into this expected rally.]
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: Please note the discussion on disclosures in the article. I am actively trading a significant amount of shares around a core long term position. I also DRIP the stock and actively engage in writing covered calls.
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