B&G Foods is down 60% from its high. Time to buy?

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B&G Foods (BGS 0.36%) Not your typical food company, and conservative investors should probably look to more mainstream fare General Mills (NYSE: GIS ) or Kraft Heinz (NASDAQ: KHC ). More aggressive types, however, may find B&G Foods’ opportunistic approach to acquisitions quite attractive. Make sure you know what you know before you buy these high-yield stocks. Here’s a closer look.

Not as beautiful as once

General Mills is paying investors a dividend of 2.6%. Kraft Heinz’s yield is 3.7%. B&G Foods yields about 5.5%. That compares quite attractively to other food manufacturers and the S&P 500 index, where an index-linked ETF would give you roughly 1.6% yield.

An investor is watching trends on a computer.

Image source: Getty Images.

There’s one problem, though: B&G Foods recently cut its dividend by 60%. Not too long ago yields were high. In fact, the yield was over 15% at one point, when Wall Street began to realize that high dividends were unsustainable and that the stock was likely a yield trap. Dividend cuts aren’t usually 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 to be expected given that the stock price has been in a downward spiral for nearly two years. Right now, shares are down about 60% from their 2021 high. But they have risen more than 10% this year as investors reassessed the company’s prospects after the dividend cut.

It’s not shocking. According to the company, “Due to the current inflationary environment and rising interest rates under our credit agreement, all of our excess cash as a result of prior dividend rates has been paid in dividends.” This left little room for anything else, notably debt reduction.

The fact that the company is now focusing on shrinking its balance sheet is undoubtedly a good thing. In fact, the proceeds from the sale of a brand in January can also be used to reduce debt. The company is clearly making an effort to improve its financial base.

Debt is still a big problem

Despite this significant priority shift, the stock is still only suitable for aggressive investors. For starters, the leverage factor. 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 is at 3. B&G Foods has a lot of work to do on its debt front

Complicating matters for the food maker is that its time-to-interest-earnings ratio has been below 1 over the past 12 months. A number of 1 or higher on this metric 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 creditors. This is a worrisome issue, and perhaps a key reason for the focus on debt reduction. The combination of these two points is a cause 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 merged with Heinz). B&G Foods then focused on product innovation and increased advertising and promotional activities to improve the performance of brands that were largely forgotten within larger companies.

This is a contrarian trading method that value investors can find quite attractive. Add a generous dividend yield and it becomes even more enticing. Leverage is a concern, but the company is clearly trying to get a handle on it.

This is good in theory, but the problem is that an acquisition-driven business model like the one used by B&G Foods may require the ongoing use of debt. So companies’ improved levels of leverage aren’t exactly transitory, they’re 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 keep a close eye on the company’s balance sheet — and perhaps wait for more material improvements before jumping ship.

Big risk for big reward

After such a large price decline, B&G Foods’ stock price may have the potential for material upside. The key will be to execute on the company’s unique business model while simultaneously reducing leverage. For aggressive types willing to bet that the company can achieve this feat, which won’t be easy, a post-dividend-cut buy could make sense.

Just know that the issues caused by the dividend cut are not yet resolved and may cause additional financial headaches in the future due to the nature of the company’s business practices. It is likely that you will always have to pay close attention to the company’s balance sheet.


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