B&G Foods (BGS -1.09%) has staked out a unique position in the food industry. That includes passing on a large percentage of its earnings to shareholders in the form of dividends. But is this high-yielding food maker worth the risk for investors? Here are some things to think about when trying to decide whether this is a safe investment or not.
One person's trash
B&G Foods' core business is to buy unloved brands from larger companies and smaller brands that need extra heft to compete with the industry big boys. The company essentially gives the brands it acquires the marketing, distribution, and product development love they were lacking to help them succeed. It has, on the whole, done a pretty good job executing this model.
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But it is important to keep in mind that B&G Foods is an industry small fry itself. Even after its stock gained roughly 130% over the past year, its market cap is just $2.4 billion. Compare that to companies like General Mills (GIS -0.32%) and Campbell Soup (CPB -0.37%), which sport market caps of $36 billion and $15 billion, respectively. That isn't to suggest that B&G Foods is bad, only that it is small and up against some stiff competition. And reviving cast-off and minor brands is no easy task compared to maintaining industry-leading brands, which is what its larger brethren focus on. All told, if you are looking at the food space, B&G Foods' approach is on the risky side of the spectrum.
Leverage matters
One key point here is that B&G Foods' entire business model is built around acquisitions. That has led to a significant amount of leverage. Its debt-to-equity ratio is around 1 compared to about 0.8 at Kraft Heinz, which cut its dividend not too long ago, and 0.4 at Campbell Soup and General Mills. B&G Foods covers its trailing interest expenses by 2.7 times, which is better than Kraft Heinz's 1 time, but nowhere near as good as Campbell Soup's 4 times or General Mills' 7.6 times.
To be fair, leverage is kind of inherent in an acquisition-driven business. But leverage increases risk and that fact shouldn't be ignored.
Fat dividends
The first two points cited highlight why B&G Foods' 5.5% dividend yield is well above those on offer from General Mills and Campbell Soup, which have yields of 3.5% and 3%, respectively. Notably, that yield is still 5.5% despite the fact that B&G Foods' stock has more than doubled over the past year.
Here's the somewhat scary thing: B&G Foods' payout ratio is hovering around 90%. That compares to ratios around 50% for General Mills and 25% for Campbell Soup. With so much cash going out the door, it wouldn't take much of a setback to put B&G Foods' dividend at risk. That doesn't mean it will cut the dividend, since dividends come out of cash flow and not earnings, but a high payout ratio is a warning sign that a dividend may not be sustainable. In other words, once again, the risk appears elevated here.
When the good times end
So, with all of the risk around B&G Foods, why did the stock go up so much over the past year? The answer is that the company has gotten a huge shot in the arm from consumers that are eating at home more often because of the COVID-19 pandemic. Third-quarter sales increased 22% year over year in 2020, with earnings up a hefty 50%. That's pretty impressive, but it is far from clear if that trend will continue once the world moves past the coronavirus.
That's true for all consumer staples makers, of course, but when you add in the other risks inherent to B&G Foods, it looks like the risks will likely outweigh the rewards here for most investors.
For stout hearts
Conservative dividend investors should probably avoid B&G Foods. That might be hard, given the fat yield. But the safety of the dividend and the company's debt-heavy and aggressive business model are notable issues. In the end, B&G Foods is really only appropriate for more aggressive investor types. Even then, after the massive stock advance over the past 12 months, some extra caution might be in order.
