Flowers Foods (NYSE:FLO) has incredibly stable operations, currently serves 79% of Americans, and offers a dividend yielding 2.3%. Flowers Foods has, for these reasons, the potential to outperform some of the big boys in the packaged food industry such as General Mills (NYSE:GIS) and Kellogg (NYSE:K) and make an excellent long term holding.

Stability through the recession
Operational stability is crucial for any company an investor wishes to add to their portfolio for the long term. Even in a ten year period that includes a major recession, Flowers grew their revenues an average of 9.2%, revenues only declined in one fiscal year in that period, 2010. This is approximately double the growth rates exhibited by both General Mills and Kellogg, who grew revenues by 4.8% and 4.4% annually, respectively, over the same time frame. Selling within a narrow product line and making very smart acquisitions has helped Flowers achieve these excellent results.

As Flowers Foods primary sales driver is bread, which the company estimates 98% of American households buys on a regular basis, stable and growing sales shouldn't surprise investors. However to go along with growing sales, the company has also been able to steadily grow their margins over the last ten years as well. Operating margin has been on a slow, upward path from 5.3% in 2004, to 8.9% last fiscal year.

Only 79% of American served
Believe it or not, 79% of the American population buys a Flowers Foods product on a regular basis. Servicing 79% of America is impressive but it also shows us that there is plenty of room for growth. The company has a goal to reach 90% of the population through direct store delivery by 2018.

This means that if all goes well, within four short years Flowers Foods will have 14% more of the American population to sell their products to. This, along with the company's product line growth, and regular price increases, should help Flowers easily achieve the 5%-10% sales growth they have set for themselves as a long term goal and take market share from competitors.

Strong dividend backed by cash flow
Flowers Foods has a dividend of 2.3%, which is actually lower than General Mills and Kellogg, who pay shareholders 3% and 2.7%, respectively. Though it is lower yielding now, as we discussed Flowers Foods is growing much more quickly than their larger counterparts, and the dividend is no exception to that growth.

Flowers Foods's dividend has a compounded average growth rate (CAGR) of over 16.3% over the last ten years, compared to General Mills and Kellogg with CAGR's of 9.6% and 6%, respectively.

Flowers Foods should be able to continue paying and growing its dividend on a regular basis for many years into the future. They have had stable free cash flow to equity, which is cash from operations minus the cash used for investing, plus any net borrowing. The company's free cash flow to equity coverage of the dividend has averaged 1.18 times over the last five years, with a downward trend due to acquisition spending.  Spending on acquisitions decreases cash flow initially, however if it is a smart acquisition that grows sales and produces cost savings, cash flow to equity should soon revive and grow higher.

Flowers in a nutshell
With a market capitalization of $4.3 billion, Flowers Foods is a small fish compared to General Mills with a market capitalization of $32.5 billion, and Kellogg with a market capitalization of $23.7 billion. Flowers also has a very small range of products compared to the other two, as Flowers generates 73% of sales from bread products and General Mills and Kellogg sell almost everything under the sun it seems.

Currently, Flowers is selling at over 24 times earnings, compared to General Mills at 19.5, Kellogg at 12.7, and the broad market at 18.6 as represented by the S&P 500. However because there are significantly different growth rates for these companies, comparing P/E ratios is like comparing apples and oranges. Therefore we can look at the PEG ratio, or the price to earnings ratio divided by expected growth. By the PEG ratio Flowers is actually valued quite a bit lower than their competitors, as their PEG ratio is 1.6. General Mills' and Kellogg's PEG ratios are 2.6 and 2.7, respectively.

Flowers should treat investors' portfolios nicely over the coming years as the company continues growing, geographically and by product base. The management team at Flowers Foods has produced large amounts of shareholder value in the past and will continue to do so in the future.