When packaged food maker B&G Foods (NYSE:BGS) reported earnings for the first quarter of 2021, it said sales were up by a hefty 12.4% year over year. That's a pretty impressive showing. But there was an important caveat appended to that number, and it speaks to the very nature of this company's business model. It's also why investors need to be careful with this high-dividend-yielding food stock.
B&G Foods' 12.4% year-over-year first-quarter sales advance was helped along by its acquisition of Crisco in December 2020. The company's specific wording in its earnings release back in May was "driven by the Crisco acquisition and continued strong base business net sales." But if you take out Crisco, B&G sales were down 0.6%, "driven" by weakness in the company's Canadian business. There's a big difference between 12.4% and negative 0.6%. Indeed, when you look a bit deeper, the comment that the base business was "strong" is a little hard to swallow. To be fair, the company's U.S. sales were up 2.5%, but that doesn't change the weak overall sales performance when you remove the benefit of the Crisco purchase.
That said, 2020 was an odd year, with sales growth pushed notably higher for packaged food companies because of the effects of the pandemic. There was bound to be some giveback, with many in the sector providing two-year compound numbers in an attempt to adjust for what is likely to be a one-time benefit.
However, investors really need to step back and consider the risks inherent in B&G Foods and its huge 6.3% dividend yield. And the effect of the Crisco acquisition in the first quarter is actually very telling.
Buy, buy, and buy some more
B&G Foods' core avenue for growth is acquisitions. While it sometimes buys small, new brands that can benefit from its larger distribution network and advertising strength, the foodmaker has generally favored acquiring castoffs from larger competitors. Crisco is a prime example of a brand that was no longer a good fit for the previous owner, J.M. Smucker. It likely wasn't being given the same kind of love that the company's core brands were getting.
By selling it to B&G Foods for $550 million in late 2020, J.M. Smucker placed the iconic shortening brand into a company where it would no longer be an also-ran. The fact that adding Crisco was enough to push B&G Foods' sales up 12.4% is all you need to see just how important the brand is to its new owner.
In fact, B&G Foods owns a stable of cast-off brands, including icons like Green Giant canned vegetables and Cream of Wheat, among many others that you likely know. Truthfully, B&G Foods has, overall, done an excellent job at managing the brands it takes on, increasing advertising and innovation. However, the model is inherently driven by acquisitions. And that means balance sheet strength is something that needs close monitoring.
On that front, B&G Foods is one of the most leveraged names in the packaged food space, with a debt-to-equity ratio of nearly 2.8 times at the end of the first quarter. General Mills (NYSE:GIS), which itself did a big deal a few years ago, has a debt-to-equity ratio of around 1.3 times, and Kraft Heinz (NASDAQ:KHC), which cut its dividend so it could reduce leverage, has a debt-to-equity ratio of 0.5 times.
This isn't meant to suggest that B&G Foods is about to falter or that its model is bad. However, the stock price is up some 60% or so since the start of 2020. General Mills and Kraft Heinz are only up 12% and 22%, respectively. On the dividend front, General Mills yields 3.3% and Kraft 4%. Investors are pricing in a lot of good news at B&G Foods.
Meanwhile, it is starting to lap some very good quarters in 2020, and its sales probably won't look nearly as good as they did last year -- when you strip out the Crisco deal. As investors start to fully digest what's going on here, including the inherent leverage risk in the company's business model, a shift toward a risk-off attitude on Wall Street could end up with B&G Foods' shares being afforded a lower valuation.
You get what you pay for
There's a reason why B&G Foods has such a high yield relative to its larger peers. Its basic approach, built on debt-fueled acquisitions, is simply riskier than what most of its competitors do. It is not a good fit for risk-averse income investors. Right now, given the weakening trend in the underlying portfolio when you strip out the Crisco deal, the big run over the past year or so could be increasing downside risk.
If you are looking at B&G Foods or if you own it, pay close attention to the next few earnings reports and make sure to look past the headline numbers, because that's not telling the whole story today.