B&G Foods (BGS -1.09%) is not your typical food company, and conservative investors should probably look at more mainstream fare like General Mills (NYSE: GIS) or Kraft Heinz (NASDAQ: KHC). More aggressive types, however, might find B&G Foods' opportunistic approach to acquisitions pretty attractive. Make sure you know what you own before you buy this high-yield stock. Here's a closer look.
Not as nice as it once was
General Mills is offering investors a dividend yield of 2.6%. Kraft Heinz's yield is 3.7%. B&G Foods' yield is around 5.5%. That's pretty attractively relative to other food makers and to the S&P 500 Index, where an index-linked ETF will only net you a yield of roughly 1.6%.
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There's one problem, though: B&G Foods recently cut its dividend by a whopping 60%. The yield was much higher not too long ago. In fact, the yield was over 15% at one point, when Wall Street started to realize the lofty dividend was not sustainable and the stock was likely a yield trap. Dividend cuts are usually not good news, and conservative income investors should probably see this cut as a warning that B&G Foods is a name to avoid.
That said, the cut seemed like it was expected given that the stock price had been in a downtrend for roughly two years. At this point, the shares have fallen around 60% from their early 2021 highs. But they are up more than 10% this year as investors reassess the company's prospects following the dividend cut.
That's not shocking. According to the company, "In large part because of the current inflationary environment and rising interest rates under our credit agreement, the prior dividend rate resulted in substantially all our excess cash being paid in dividends." That left little room for anything else, notably including debt reduction.
The fact that the company is now focused on shoring up its balance sheet is undoubtedly a good thing. In fact, the proceeds from the sale of a brand in January are likely to be used for debt reduction, too. The company is clearly making an effort to improve its financial foundation.
Debt is still a big issue
Despite this notable priority shift, the stock is still only appropriate for aggressive investors. For starters, leverage is material. At the end of the third quarter, debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at a shockingly high 14.8. For reference, Kraft Heinz's number is closer to 6, while General Mills comes in at 3. B&G Foods has a lot of work to do on the debt front.
Complicating things for the food maker is the fact that its times-interest- earned ratio is below 1 over the trailing 12 months. A number of 1 or above on this metric essentially means a company is able to pay its interest expenses. A number below 1 indicates that it is not making enough money to pay its lenders. That's a worrying problem, and is likely a key reason for the focus on debt reduction. The combination of these two points is a reason for caution.
And yet, B&G Foods has a strong track record of buying unloved brands, including Green Giant from General Mills and Cream of Wheat from Kraft (before it combined forces with Heinz). B&G Foods then focuses on product innovation and increased advertising and promotional activity to improve the performance of brands that were, essentially, forgotten within bigger companies.
It's a contrarian business approach that value investors might find quite alluring. Add in a generous dividend yield and it gets even more enticing. Leverage is a worry, but the company is clearly trying to get a handle on it.
That's good in theory, but the problem is that an acquisition-driven business model like the one B&G Foods uses is likely to require the ongoing use of debt. So the company's elevated levels of leverage are not exactly transitory, they are more likely to remain a part of the business model going forward.
The dividend reset will help with the current leverage overhang, but even more aggressive investors should be keeping a close eye on the company's balance sheet -- and perhaps waiting for more material improvement before jumping aboard.
Big risk for big reward
After such a massive price decline, there could be material upside potential in B&G Foods' stock price. The key will be executing on the company's unique business model while at the same time whittling down leverage. For aggressive types willing to bet that the company can achieve this task, which won't be easy, a post-dividend-cut purchase might make sense.
Just go in knowing that the problems that led to the dividend cut are not yet solved and could still lead to additional financial headaches in the future because of the nature of the company's business approach. It is probable that you will always have to pay close attention to the company's balance sheet.
