Can B&G Foods Satisfy Your Dividend Appetite?
Are you hungry for dividends? If so, you're definitely not alone. The popularity of stocks with solid dividends has soared with bond yields near historic lows.
One stock benefiting from the dividend wave is B&G Foods (NYS: BGS) , maker of a wide variety of food products. B&G shares are up 20% so far this year. Let's take a look at whether B&G Foods can satisfy investors' dividend appetites.
B&G sells food products that are "shelf-stable," meaning that they can be stored at room temperature for a long shelf life. The company currently pays a nice dividend yield of 3.8%, but is this yield as shelf-stable as its foods? Looking back over the past few years, the answer appears to be "yes."
BGS Dividend Yield data by YCharts
While B&G's yield declined from the peak in 2009, the reason is that the stock price skyrocketed. Yields over the last year appear to be relatively stable. Meanwhile, the dividend has seen two increases in 2011 and another to kick off 2012.
However, the company's dividend payout ratio currently stands at 82%. This ratio, which represents the percentage of earnings paid out as dividends, helps investors determine how sustainable a company's dividends are.
B&G's payout ratio doesn't compare too favorably with other food companies. Kraft Foods (NYS: KFT) pays a dividend yield of 2.8% with a payout ratio of 57%. The yield and payout ratio for Unilever (NYS: UN) nearly mirror those levels at 2.9% and 58%, respectively. H.J. Heinz (NYS: HNZ) comes in a little closer to B&G with a yield of 3.7% and payout ratio of 67%.
Despite these less-than-ideal comparisons, B&G's dividends probably aren't in any serious jeopardy. Actually, things look better on the payout front than they have in the past.
BGS Payout Ratio TTM data by YCharts
The improvement in payout ratio reflects strong earnings growth over the past several years. B&G's earnings per share increased more than 17% annually over the past five years.
Dividend investors face other dangers with any stock, though. Perhaps the worst threat is that the stock collapses and doesn't recover enough for the dividend payments to outweigh the losses.
Diamond Foods (NAS: DMND) exemplifies this risk all too well. Shares of the food company plummeted more than 74% in the last year. The company's dividend payments won't help much for investors who held on to the stock during this period.
With this in mind, are there any yellow flags for B&G Foods? The short answer is "yes."
B&G carries a high level of intangible assets on its books. Ideally, the ratio of intangible assets to total assets would be below 20%. B&G's intangible assets ratio tops 78%. The risk lies in the potential for the company to be forced to write off significant amounts of these assets. If this event occurred, B&G stock could crumble as easily as the tortillas it sells.
The company's debt level presents another cause for worry. Generally, we would prefer debt-to-equity ratios below 30%, although some industries average higher ratios than this. B&G's debt-to-equity ratio of 296% dwarfs our preferred level. The competitors mentioned earlier -- Kraft, Unilever, and Heinz -- all have significantly lower debt-to-equity ratios.
One encouraging sign is that B&G appears to be borrowing only for smart investments that boost the bottom line. The company's acquisition of Culver Specialty Brands incurred additional debt. However, Culver accounted for essentially all of B&G's sales increase for the second quarter.
If you are looking for solid dividends, you will probably find plenty to like about B&G Foods. The company seems positioned to continue providing healthy dividend yields. However, B&G comes with some unhealthy ingredients to watch out for -- high intangible asset and debt levels.
The stock is also currently trading well above the median analyst target price of $26 per share. Investors probably should exercise caution and wait for a pullback closer to this price level before buying. My guess is that this price point will be much more palatable than current prices.
The article Can B&G Foods Satisfy Your Dividend Appetite? originally appeared on Fool.com.Fool contributor Keith Speights owns no shares in the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of H.J. Heinz. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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