B&G Foods: Dividend Dynamo or the Next Blowup?
Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how B&G Foods (NYS: BGS) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether B&G is a dividend dynamo or a disaster in the making.
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
B&G yields a whopping 4.9%, considerably higher than the S&P 500's 1.9%.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
B&G has a moderately high payout ratio of 76%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
B&G has a debt-to-equity ratio of 306% and an interest coverage rate of three times.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Although B&G's earnings fell in 2009 along with the economy, they've made a comeback -- and then some. All told, over the past five years, the company's earnings per share have grown at an average annual rate of 20%, while its quarterly dividend has grown from $0.21 per share in 2007 to $0.27 today.
The Foolish bottom line
So is B&G a dividend dynamo? It could very well be. It has a massive yield, a manageable payout rate, and growth to boot. Dividend investors will want to keep an eye on the company's interest payments and earnings stability to ensure that its debt burden doesn't get out of hand, but so far that hasn't been an issue. If you're looking for some other great dividend stocks, I also suggest you check out "Secure Your Future With 9 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these nine generous dividend payers -- simply click here.
At the time this article was published Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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