I wrote my first article on B&G Foods (BGS) for Seeking Alpha in the middle of 2011. At the time, it was trading at ~$18 and its $0.84 annual dividend yielding 4.7% was the main reason for recommending its purchase. The small ($0.5 billion in sales) packaged food company had several well-known brands (including Cream Of Wheat and Ortega) and the yield was far better than most of its much larger competitors. Seven years later the revenue has increased to ~$1.7 billion, the price is around $30 per share and the dividend has increased to $1.90 per share, driving the yield up to 6.3%. That dividend yield is still far better than its much larger competitors in the packaged food industry.

Most, probably all, of that growth has come from making accretive acquisitions of specific brands from others in the industry, including Green Giant from General Mills (GIS), Mrs. Dash from Unilever (UL) and the spices and seasonings business from privately held ACH Food Companies, Inc. Those acquisitions have fueled the increases in the dividend. And, although I recently wrote an article titled, Look For B&G’s Remarkable Dividend Growth To Falter, I also noted that I remain long for that hefty dividend. What prompted the expectation of dividend growth moderating was the divestiture of its Pirate’s brand and the failure of the company to make any significant acquisitions in 2018. In fact, last year the company divested far more revenue than it acquired.

It’s that dividend that prompted me to write this particular article. Long-time investors in B&G are aware that the company has a long history of classifying a portion of the dividend as Return of Capital (or ROC). This reduces one’s cost basis, while simultaneously reducing the reported dividend income investors will see on their 1099s. In essence, it replaces one form of current tax advantaged income (the dividend) with another tax advantaged form of current income (long-term capital gains) if the cost basis is driven below the investor’s purchase price. Or, if the investor wasn’t lucky enough to purchase shares at very low prices, the reduced cost basis from the ROC could result in an increase in long-term capital gains at some point in the future.

ROC is a topic that routinely arises in the comments section of Seeking Alpha articles on B&G. And since it comes up so often, I began writing articles about the breakdown. Almost a year ago this was discussed in an article titled, A Whopping 70% Of This Packaged Food Company Payout Wasn’t A Dividend. That 70% was the result of just over $1.29 of the $1.86 2017 dividend being classified as ROC. I wrote:

In 2011, 70.4% of the $0.78 payout was a dividend and 29.6% was a return of capital. By 2012, the numbers had flipped, with 58.2% of the $1.04 distribution classified as return of capital. Since 2013, the return of capital portion has been as erratic as the dividend, with 75.8% of $1.19, 66.6% of $1.35, 37.7% of $1.37, and 34.7% of $1.61 being classified as return of capital for the periods 2013-2016.

Looking at the detailed IRS Forms 8937 filed by B&G, we can see that the return of capital from 2011-2016 was $0.2366, $0.6057, $0.901851, $0.899097, $0.516269, and $0.557673.

So, what does this mean? Since the cumulative return of capital had reached more than $3.15 by the end of 2015, those that were fortunate enough to buy shares at the lows back in 2008-2009 when the stock could be purchased at prices below $3 have already had their cost basis reduced to zero by the end of 2015, and even those that purchased below $3.72 had their cost basis go to zero by 2016. With 2017 reducing the cost basis by another $1.293528, those that purchased at prices below $5.01 have now joined that group. Since their cost basis cannot go below zero, their return of capital portion in excess of these cumulative amounts has been, or would now be, reported as a capital gain.

So, what’s the dividend surprise? For 2018, 100% of the dividend was actually classified as dividend rather than any portion being classified as ROC. It prompted the following recent press release by B&G, noting:

In 2018, B&G Foods distributed $1.8800 per share of common stock (CUSIP # 05508R 10 6). Based on U.S. federal income tax laws, B&G Foods has determined that all of such distributions will be treated as a taxable dividend and no portion will be treated as a return of capital.

It’s not something companies typically find worthy of a press release – notifying their shareholders that their dividend was all dividend. Then again, there aren’t too many companies that have had seven consecutive years where a portion of the dividend was classified as ROC. Was 2018 the new normal, or will 2019 once again show a portion of the dividend representing a return of capital? From the company’s website:

It is possible that a portion of the dividends paid by B&G Foods during 2019 could also represent a return of capital distribution to recipients for U.S. federal income tax purposes. However, the determination of the actual characterization of distributions made during 2019 cannot be determined until after the close of the year.

2018 was an unusual year for B&G. It sold its fifth largest brand – Pirate’s – for $420 million. This was a brand that the company purchased in the middle of 2013 for $195 million. Even if we assume that there was no amortization of a portion of the purchase price, there was still a significant gain of $225 million on the sale. It is this extraordinary item that I believe generated enough after-tax profit to reduce the ROC portion of the dividend to zero.

Pirate’s was the only brand sold by the company since going public in 2006. And, since I don’t anticipate any brand sales in 2019, I fully expect to see ROC once again comprising a portion of the 2019 dividend.

Disclosure: I am/we are long BGS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long BGS and currently am reinvesting dividends. I also have written covered calls with a variety of strike prices and various expirations against more than half my position. Should the price rise above my perception of fair value, I may sell at any time. I may also add at any time if I see significant weakness.

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2019-01-16