Can Premium Brands Sustain Its Premium Dividend?

The company just raised its already enticing dividend by more than 6%. Time to worry?

| More on:
The Motley Fool

In its earnings release last week, Premium Brands Holding Corporation (TSX: PBH) announced that it had raised its quarterly dividend by 6.3%, pushing the total annual yield on the dividend to 6.5%.  While Canadian investors are used to seeing lucrative dividend checks from the energy industry and the likes of Canadian Oil Sands (TSX: COS), which currently yields 6.8%, food industry corporations which offer robust dividends remain a rarity. Loblaws (TSX: L), for example, returns a very decent if representative 2% per year.

Premium Brands invests in manufacturers and distributors of specialty foods across a broad swath of Canada, and in Nevada and Washington State.  The company increased revenues by more than 22% in 2012, to $968 million, and has more than doubled revenues since 2009, with acquisitions playing a significant role in this growth. Yet the company has struggled to post appreciable profits: net income as a percent of sales has declined over the same period, from 4% in 2009 to 1.5% in 2012.

Premium Brand’s 2012 net income amounted to $15.2 million. During the year, the company paid out $24.0 million in dividends.  Issuing dividends in excess of earnings has been a trend at Premium Brands for several years.  This is possible because the company’s net income reflects significant portions of non-cash items. As an acquirer of businesses, it incurs amortization expense of goodwill booked to those acquisitions. Also, depreciation tends to be a significant non-cash expense as the company owns asset-heavy manufacturing and distribution operations. The company’s actual operating cash flow last year was $50.8 million.

Debt is an issue

If we could stop the story here, all would be well. But Premium Brands has used quite a bit of debt to help fund its numerous priorities in recent years. These priorities include business acquisitions, capital expenditures, and maintaining the attractive dividend. As of June 29th, 2013, the company had utilized $327.6 million of $379.5 million of various credit facilities available; that’s 86% of available credit utilized.

In addition, due to long-term and short-term debt incurred, and the lack of adequate balance sheet resources at hand, the company is a little too close for comfort on some of its debt covenants with its lenders. For example, the company is required by its lenders to maintain a current ratio (ratio of current assets to current liabilities) of 1.30.  Premium Brands just passes muster here, with a current ratio of 1.37 as of June 29th, 2013.

The company will likely focus on reducing its debt load in the next two years, as well as refinancing or otherwise extending some maturities of debt, including $108 million of scheduled principal repayments in 2014.  Managing the debt with available cash flow, as well as continuing to invest in property, plant, and equipment, clouds the dividend picture over the next two to three years. For example, while Premium Brands generated $50.8 million in operating cash flow last year as mentioned above, it used $32.0 million in investing activities, primarily in capital expenditures, and it used $19.6 million in financing activities, which included paying $24.1 million in dividends to shareholders (the end number is lower than the dividend due to a net issuance of new debt).  So the company essentially used all the operating cash it generated, plus another $800,000 during the year.

Proceeding with caution

To maintain its dividend going forward, Premium Brands must continue to increase revenues and earnings, and there’s little room for error. While the dividend certainly seems safe for this year, investors should carefully evaluate quarterly results into 2014. Any miss-steps in the form of lower earnings in the near future may result in Premium Brands having to shave off some of that enticing, premium dividend it supplies to its investors.

13 High Yielding Stocks to Buy Today

Assembling an air-tight portfolio can be a tall order. But every seasoned investor knows this little secret: You can build your portfolio and protect it with high-yielding dividend stocks!

To help take the guesswork out of dividend investing, The Motley Fool assembled a Special FREE Report, “13 High-Yielding Stocks to Buy Today.” Just click here now to receive your copy at no charge!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Asit Sharma does not own shares in any of the companies mentioned at this time.  The Motley Fool does not own shares in any of the companies mentioned at this time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Businessman holding AI cloud
Tech Stocks

2 Stocks That Could Grow Your Portfolio Over the Next Decade

These two TSX stocks could be stellar additions to your long-term portfolio, given their multi-year growth potential and discounted stock…

Read more »

Wireless technology
Tech Stocks

These Tech Stocks Are Growing up to 138% Despite the Recession

Growth stocks like WELL Health Technologies (TSX:WELL) are thriving, despite the recession.

Read more »

close-up photo of investor Warren Buffett
Stocks for Beginners

New to Investing? Here’s 1 of Warren Buffett’s Most Important Quotes

As market uncertainty continues to intensify, here's some advice from the Oracle of Omaha to help you navigate this environment.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

Want Easy Passive Income? Go With These 3 Canadian Dividend All-Stars

Are you looking for easy passive income? Here are three Canadian dividend all-stars.

Read more »

Man data analyze

3 of the Top-Growing Stocks on Earth

Canadians desperate for growth in a shaky market may want to look to growing stocks like Cardinal Health Inc. (NYSE:CAH).

Read more »

Nickel ore is mined from the ground.
Metals and Mining Stocks

Offset Market Volatility With a Shiny Investment

Looking to offset market volatility with a shiny investment you can hold for the long-term? Here’s a precious option to…

Read more »

grow dividends
Tech Stocks

BlackBerry (TSX:BB) Stock: The Best Buy for Your RRSP

BlackBerry stock is still falling after its quarterly result, despite a 28% revenue increase in its Internet of Things segment.

Read more »

green energy
Dividend Stocks

These Monthly Dividend Payers Could Carry Your Portfolio for Years

Building a portfolio takes years. Without further ado, invest in these monthly dividend payers and start earning.

Read more »