What happened
Shares of B&G Foods, Inc. (BGS -1.09%) are jumping today, up 13.3% as of 1:48 p.m. EDT, after the company behind well-known brands like Green Giant and Mrs. Dash announced first-quarter earnings.
The packaged foods maker and distributor reported revenue of $431.7 million, with earnings per share of $0.31 on a GAAP basis and $0.55 adjusted for certain items. The sales result came in very close to analysts' expectations for $432 million in revenue, while its $0.55 per share in adjusted earnings was better than the $0.53 per share expected.
Image source: B&G Foods.
So what
It wasn't just a small beat on B&G's adjusted bottom-line result that's driving its stock price higher today. Since late 2016, B&G's cash flows have fallen sharply, putting its dividend at risk. This is a key reason why shares have fallen by more than half since their peak in 2016, even after today's big increase. It has also emboldened short-sellers to pile into the stock. At last count, more than a quarter of shares outstanding were sold short:
On today's earnings call, management addressed the dividend, and said on multiple occasions that supporting the dividend is a priority. In response to a question on the call, CEO Robert Cantwell said the following:
So we're going to generate upwards of $275 million [in cash] this year, and our cash dividends of about $125 million. So plenty of room. There's no risk to the dividend. It is, from a board perspective, a very important part of our model. And we are focused on cash flow here and cash flow to drive balance sheet to allow us to continue to do the right thing with our balance sheet, whether that's an M&A or buying back stock, et cetera, or continuing to pay down debt, but also to have that cash available at all times to pay dividends.
And we've certainly -- we -- internally, it's not a question that even comes up because we know that there's no issue with us paying cash dividend. I get confused sometimes with the external concerns on our cash dividend. We're a major cash generator, and the dividend is a small piece of our net cash generation.
Management also held firm on its guidance for full-year results, but the reaction today seems to be to management's -- and apparently the board of directors' -- steadfast position on maintaining the dividend, as well as entertaining the idea of share buybacks at this level.
Between the positive support for the dividend by management and the board and the strong cash flow expectations Cantwell outlined in his comments, it's likely that a big part of today's jump is short-sellers buying up shares to close their short positions out.
Now what
With a dividend yield well over 7% even after today's big price increase, I have to admit that B&G Foods looks quite attractive right now, particularly since management is so focused on maintaining the payout. But at the same time, the packaged foods business is ultracompetitive, and many legacy brands -- which make up the core of the company's business -- are facing competitive pressure from newer brands that appeal to younger buyers who prioritize natural and organic foods over brand names.
But B&G Foods is working to increase its participation in this segment, with its existing brands and via acquisitions, while also improving its cost structure and bottom line. If it can execute on this strategy, today's price -- and fat yield -- could be a real bargain in a few years. But it's not a given that it will happen, so before you buy, consider your willingness to take on the risk that cash flows weaken and the dividend must be reduced.
