You only need to know one thing about 2022 and how it affected B&G Foods(NYSE: BGS) to understand how bad a year it was. The company cut its dividend. This is a step that most companies want to avoid because it sends a terrible message to investors. It's little wonder the stock is down some 45% over the past year. Still, there are some positives to consider. Let's see what they are.
A unique model
The foodmaking industry is a hard business to break into, because it's dominated by large companies with established brands. Given the size and brand recognition of the industry's leaders, they have the financial wherewithal and clout to invest in innovation, advertising, and distribution that smaller peers lack. So B&G Foods hasn't tried to compete directly. Instead, it has chosen to be more of a partner to the big guys.
Image source: Getty Images.
Essentially, B&G Foods buys from larger competitors brands that have fallen out of favor. This approach allows big companies to jettison unwanted and often lower-margin items so they can invest all of their time and money into their most profitable products. B&G Foods takes the brand and gives it the love it lacked when it had to compete within a larger brand portfolio.
An example is Cream of Wheat, which B&G Foods bought in 2007 from Kraft, back before it became Kraft Heinz(NASDAQ: KHC). One of the first things B&G Foods did was introduce new flavors, a fairly simple decision, but one that probably couldn't compete with other uses of capital at Kraft.
B&G Foods also buys smaller brands that it nurtures, given that it often has a larger distribution network and greater advertising strength than what it's buying. A good example here is Pirate's Booty, which B&G Foods acquired in 2013 for $195 million and sold in 2018 for $420 million to Hershey(NYSE: HSY). For investors who likes to take a contrarian approach, B&G Foods' business model should be of interest.
A rough year
That said, 2022 was a hard year for the company. There were issues that hit the entire consumer staples space, notably inflation. But there was also a unique factor here that made rising interest rates an extra-large problem. The company's brand-buying efforts have long been supported by debt, with the company's debt-to-equity ratio a very high 2.75. By comparison, Hershey's ratio is 1.45 and Kraft Heinz's is roughly 0.4.
Essentially, just as the company's profit margins were being squeezed by rising costs, it was also hit by increasing interest expenses. The dividend cut, while not great news for investors, was the right call to free up cash.
BGS Debt to Equity Ratio data by YCharts
Yet, there are some important trends to monitor that suggest B&G Foods is making progress as it looks to improve performance. The key is a mixture of cost-cutting and price increases, which are the tactics all of its peers are using, too.
For example, B&G's gross profit margin in the first quarter of 2022 was 19%. That fell to 16.5% in the second quarter, removing the impact of acquisitions and divestitures. But it recovered to 20.4% in the third quarter and 20.6% in the fourth. Notably, the year ended on a strong note, with the fourth-quarter adjusted gross profit margin up from 19.7% in the final stanza of 2021.
The underlying business, in other words, appears to be moving in the right direction as the company takes the normal industry approach to the headwinds it's facing. That isn't to suggest that leverage is no longer a major risk, because it is and will probably remain so for some time. But following the dividend cut, B&G Foods should have more leeway to muddle through the current industry malaise and support its underlying operations, which are doing better than they were not too long ago.
For the right investor
B&G Foods is not a good fit for risk-averse investors and, frankly, given its business approach, probably never will be. That's true even though the dividend yield is a relatively attractive 5%. (For reference, Hershey's yield is 1.7% and Kraft Heinz's is 4.3%.) Still, for more aggressive types, B&G Foods, now that the dividend cut has been enacted, might want to revisit the stock and what appears at this point to be an improving underlying business.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
