You have to eat -- it's a basic fact of life. That's one of the big attractions of stocks like B&G Foods (BGS 1.19%), which makes a variety of items for the grocery store shelf. Food-making giants are generally slow and steady performers, a profile which attracts conservative investors. But B&G Foods is smaller and does things a bit differently from its larger brethren.
That's both good and bad, and more aggressive investors might find the stock of interest. Here are five things you'll want to know about this stock before investing.
1. A partner to the big dogs
The largest food companies own iconic brands and have the financial wherewithal to support massive advertising and distribution networks. It is hard to unseat such companies, which are vital partners to grocery stores. But not all of the brands these companies own are top-level performers, with out-of-favor nameplates often getting less support than better performers. Consumer staples companies are always pruning brands and adding new ones to the mix.
Image source: Getty Images.
B&G Foods, with a very modest $1 billion market capitalization, tries to work with the big names while still competing with them. For example, it often buys brands that aren't in vogue from bigger industry players and then gives them the love they were lacking from their former owners (Cream of Wheat is an example). It also buys smaller brands and pushes the growth envelope with its distribution and advertising strength, sometimes selling to bigger players (like Pirate's Booty).
It's probably best to think of B&G Foods as an opportunistic player in the branded food space. If you have a contrarian bent, that might fit very well with your investment mindset.
2. Leverage
Buying and selling brands isn't cheap, and as an industry small fry B&G Foods has ended up relying heavily on debt to fund its deals. That materially increases the risk profile here. To put a number on this, the company's debt-to-equity ratio is around 2.75. That's much higher than the 1.45 ratio at Hershey (HSY -0.53%), the company that bought Pirate's Booty, or 0.4 at Kraft Heinz (KHC -0.55%), from which B&G Foods bought Cream of Wheat.
BGS Debt to Equity Ratio data by YCharts
Leverage can increase returns when times are good, but it can also lead to trouble when times are tough. That leads right into point number three.
3. The trouble it's in
As interest rates have been rising over the past year or so, B&G Foods' leverage has become an increasingly heavy burden on its business. Over the past 12 months, the company's interest expense has risen from around $30 billion to $36 billion. That's a painful 20% increase in a very short period of time. Meanwhile, the company's ability to cover its trailing interest costs has declined materially over that same span, dropping below one (meaning it isn't covering its interest expense).
BGS Total Interest Expense (Quarterly) data by YCharts
This helps explain why the company's stock has declined a painful 40% over the past year. Investors have been waiting for the next shoe to drop.
4. The easy solution
One of the quickest ways for a company to free up cash is to cut its dividend if it pays one. B&G Foods pays a dividend and, as its finances got tight, it eventually decided to trim that payment. It was a fairly large cut as well, taking the quarterly per share payment from $0.475 to $0.19. That's a 60% decline.
While this was clearly the right move for the company, investors who were relying on that dividend to help pay for living expenses got slammed. This is not a company for risk-averse dividend investors, and given its business approach, it probably never will be.
5. Still interesting
For more aggressive investors, however, the contrarian approach of buying small and unloved brands might still be quite attractive. And now that B&G Foods' dividend cut has been enacted, the really bad news is out and management can focus more time and effort on its brand portfolio.
Here's the interesting thing: The yield is still a fairly attractive 4.8%. That's above Kraft Heinz's 4.1% yield and way higher than the 1.6% you'd get from Hershey. There are clearly added risks with B&G Foods, but for the right investor the benefits of owning a uniquely positioned food maker with a sizable yield may be worth it.
Not for everybody
The biggest takeaway here is that B&G Foods is not a good fit for all investors. But that does not mean it is a bad investment -- it just means you need to know what you are buying. The company's contrarian investment approach in the consumer staples space may actually be just what you are looking to add to a diversified dividend portfolio -- assuming, of course, that you can stomach the risks.
