Although there are no earnings updates or any particular newsworthy items on B&G Foods, I thought it would be a good time to update on the company as the stock has come under significant pressure. It also gives me time to gripe about the way dividends are viewed in the US.
You see, BGS’ stock is down 20.5% YTD (compared to SPY being up 14.5%). The dividend yield is now ~8.3%. However, all things considered, I’d prefer the company to turn that dividend off and buyback shares at these levels.
Companies typically establish dividends as a way of saying, “here you go, investors, I can’t invest this cash at levels that would create value for our company (i.e. in excess of our cost of capital), so I am giving it back to you.”
That’s all fine and good, but what about when things change (as they always do)? The way it works now is that dividends are viewed as sacrosanct. A company that cuts its dividend from the previous level will see its stock get crushed. It seems silly to me for that to be a rule. In some cases, the result is that CEOs/ CFOs initiate dividends to get into stock indices or attract incremental buyers. If I were CEO / CFO of a public company, the last thing I would do would be a regular dividend (even if it meant some funds couldn’t buy my stock). Special dividends, or dividends that are understood as non-recurring, seem much more prudent.
Anyway, back to B&G. It appears that private values of companies are now in excess of public companies. I also think that public investors are not valuing B&G’s platform as it should. As such, I wish B&G would (a) cut the dividend and buyback stock and (b) pursue a sale of itself. While the company would lose its public stock as currency to buy things, private markets are more comfortable with LBOs of highly cash generative companies.
What do I think B&G could sell itself for? Well, Ferrero just bought Kellogg’s cookies, fruit & fruit-flavored snacks, pie crusts and ice cream cones business for $1.3BN, or 12x EBITDA. Kellogg decided to sell this business because it had areas that it felt it could invest in for a higher return. Campell Soup, which is struggling with growth, trades for 11.5x. I think B&G should at least trade for that. Also recall that Campbell bought Snyder’s-Lance for 19.9x EBITDA pre-synergies and 12.8x post-synergies.
If B&G sold itself for 12x, that would imply a $31 price target (excluding any synergies or cost outs of no longer being a public company). I wouldn’t necessarily like that price, but it could be a catalyst for people to pay attention to the stock.
Does 12x make sense? Let’s look at the private equity math. I assume PE can carve out some costs and also the company should be lapping freight and other inflation costs. I also assume they use cash to pay down debt. It amounts to a ~16% IRR. Not a 20% winner, but not too shabby either.
