When the Canada Pension Plan Investment Board invests $200-million in your company, you know you must be doing something right.
That’s what happened with Premium Brands Holdings Corp. last month.
The CPPIB spent the money to buy a 7.1-per-cent position (2.631 million shares) in the Vancouver-based company at a price of $76.02. The company said it will use the revenue to “to repay debt, finance organic and acquisition growth opportunities, and for general corporate purposes.”
Investors were impressed. The stock jumped $6.72 after the deal was announced.
When I originally recommended Premium Brands in my Income Investor newsletter in 2013, it was a relatively small Canadian company trading at around $20, with a track record for successful acquisitions and a healthy dividend payout of more than 6 per cent. Over the years since, it has grown into one of North America’s largest food suppliers. The stock price topped $120 a little more than a year ago. It has been trading in the $75-$85 range for most of 2019.
The big breakthrough came when the Premium Brands won a contract to provide breakfast sandwiches to Starbucks. That experiment turned out to be immensely popular, and the company is now reported to be ready to sign a similar deal with Walmart. Among its other customers are Boston Pizza and The Keg.
The CPPIB deal gives Premium Brands an influential and financially powerful long-term strategic partner. The board has a strong track record of supporting long-term value creation in its investments both within Canada and internationally.
The investment also strengthens the company’s financial position. Based on its unutilized credit capacity as of March 30, together with the net proceeds of the CPPIB investment and concurrent financing, the company expects to have approximately $416-million of liquidity to support its organic and acquisition growth opportunities.
“We are very pleased to be entering into this long-term partnership with CPPIB as we embark on the next stage of our growth strategy,” said CEO George Paleologou. “As we have expanded our footprint across North America, our pipeline of acquisition and organic growth opportunities has scaled dramatically. By partnering with CPPIB, not only do we better position ourselves to execute on these opportunities, but we also secure a long-term-focused shareholder who shares our values and vision for the future. Furthermore, we gain access to the insights of a leading global investor, which will become increasingly important as we start to look beyond North America.”
A few days prior to the CPPIB announcement, Premium Brands reported record first-quarter sales of $776.6-million. That represented a $191.7-million increase (32.8 per cent) compared with the first quarter of 2018.
However, adjusted earnings per share for the quarter decreased to 52 cents from 64 cents in the first quarter of 2018. The company said this was due “to the highly seasonal nature of many of the businesses acquired in mid- to late- 2018 and to the adoption of the new IFRS-16 accounting standard.”
The company increased its quarterly dividend by 10.5 per cent in March, to 52.5 cents ($2.10 per year). The stock yields 2.5 per cent at the current price.
The yield is down substantially from 6.4 per cent at the time of the original newsletter recommendation, but anyone who bought at that time is sitting on a capital gain of about 330 per cent, so I don’t think they’ll be disappointed.
Looking forward, the CPPIB investment is a huge boost for the company. If the Walmart deal comes through, I would expect the stock to start moving back to the $100 range.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.