Hungry for dividends? Premium Brands Holdings Corp. (PBH) won’t make you rich on its modest yield alone, but the food company’s soaring share price and growing payout have hit the spot for investors.
Since I first profiled the fast-growing food manufacturer and distributor in March, 2017, the shares have produced a total return, including dividends, of about 53 per cent, crushing the total return of about 3.1 per cent for the S&P/TSX Composite Index.
For Premium Brands, such outperformance is nothing new. If you’d invested $10,000 in the company five years ago and reinvested all of your dividends, you shares would now be worth $78,600 – equivalent to an annualized return of about 51 per cent.
Now, let’s get real. Such a scorching performance can’t go on forever. But if the company can continue to execute on its growth strategy, the shares could still deliver some tasty returns for investors seeking capital and dividend growth over the long run.
The secret to Premium Brands’ stellar returns? Acquisitions. From 2005 through the end of 2017, the Vancouver-based company invested nearly $1-billion in more than 40 deals, focusing on regional food businesses with strong entrepreneurial management teams that can benefit from the capital, expertise and economies of scale that Premium Brands provides.
Last year, Premium Brands generated revenue of nearly $2.2-billion – up 18 per cent from 2016 – selling packaged deli meats, prepared sandwiches, seafood, baked goods, beef jerky and other products to customers across North America including supermarkets, convenience stores, airlines, restaurant chains and assorted food-service operators.
Even as Premium Brands’ fourth-quarter results came in below expectations, reflecting labour shortages and supply-chain disruptions, it said 2018 is shaping up as a strong year.
“We are extremely busy,” chief executive officer and president George Paleologou said on the fourth-quarter conference call in March. “We believe that 2018 will be our busiest year yet. We still have a very robust acquisition pipeline, and we think that it will continue well into 2019.”
In addition to announcing four more acquisitions for a total of $227-million – two meat producers in Ontario, one in British Columbia and a seafood distributor in Quebec – Premium Brands boosted its dividend by 13.1 per cent to $1.90 annually, the fifth increase since 2013. Based on the closing price of $120.80 on Tuesday, the shares yield almost 1.6 per cent.
With the dividend payout ratio comfortably below 50 per cent of earnings and Premium Brand’s business still growing rapidly, I would expect to see more dividend hikes ahead.
Not including the four most recent acquisitions, the company projected 2018 revenue of between $2.65-billion and $2.73-billion and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $244-million to $256-million, up from $190.2-million in 2017.
Driving the expected growth this year are a new sandwich plant in Phoenix that came online last June, a meat-cutting and distribution facility in the Toronto area that is scheduled for completion in 2018 and and cost savings and sales growth from acquisitions in recent years.
Premium Brands’ stock isn’t without risks. Rising raw material costs, a soft economy, food-safety recalls or the loss of a major customer could all hurt the company. What’s more, because the stock trades at a hefty multiple of more than 27 times estimated earnings for 2018 – implying strong growth expectations – any signs of a slowdown could deal a blow to the share price.
Those risks notwithstanding, analysts remain upbeat on the company. According to Thomson Reuters, there are seven buys, two holds on no sells. Keep in mind, however, that the shares – which have surged about 15 per cent since the fourth-quarter results were released – are already closing in on the average analyst 12-month price target of $126, which suggests short-term returns could be muted.
Even the company has expressed reservations about the rocket-like performance of the share price in recent years.
“While we are pleased to see the value inherent in our company being recognized and our long-term shareholders rewarded, we do view the recent sharp increases with some caution,” Mr. Paleologou wrote in his 2016 message to shareholders, after the stock had appreciated by about 80 per cent that year alone.
“Our long-term objective is to generate a compounded annual return for our shareholders of 15 per cent by investing in stable, well-run specialty food businesses with solid growth opportunities and attractive risk profiles.”
So before you load up on this fast-growing food stock, you might want to temper your expectations – and indulge in moderation.
John Heinzl