RJ Hamster
Is This 12% Yield Still Safe?
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SAFETY NET
Is This 12% Yield Still Safe?
Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Back in July, I covered Flowers Foods(NYSE: FLO) in one of my Safety Net columns. At the time, it had been falling for 2 1/2 years and had lost half its value. But the 6.3% yield was tempting to some investors, so we dug in to determine whether it was safe.
The stock earned an “A” rating for dividend safety.
Since then, the dividend has stayed flat… but we can’t say the same for the stock price. It has continued to slide, falling another 47%.
Because of the price decline, the yield now stands at an eye-popping 12%.
Is it still safe?
Flowers Foods is the second-largest producer of packaged bakery goods in the United States. It was founded in Thomasville, Georgia, in 1919 and now has more than 10,000 employees in 19 states.
Its brands include Nature’s Own, Dave’s Killer Bread, Wonder Bread, and Tastykake.
The company has been seeing lower volume and losing market share for several years as higher prices have put pressure on consumers, leading them to cheaper, private-label store brands.
Despite declining market share, free cash flow has actually held up quite well – until now.
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After four years of growth, free cash flow is forecast to decline in each of the next three years.
Last year, Flowers Foods paid shareholders $209 million in dividends, which was 66% of its $319 million in free cash flow.
That’s fine. I want to see a payout ratio of 75% or below to feel confident that the company can continue to pay its dividend even if free cash flow hits some obstacles.
This year, however, the payout ratio will cross that threshold and come in at 82% if Wall Street’s projections are accurate.
In fact, according to analysts, by 2028, the dividend will surpass free cash flow.View larger image
Falling free cash flow and a too-high payout ratio are both problematic.
But perhaps the company’s track record can save its Safety Net grade…Finish Reading Here
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