Flowers Foods, Inc. (FLO): Predictable Dividend Growth and a 3.2% Yield

Looking at the balance sheet, Flowers has a lot of debt on hand ($1 billion) relative to its cash ($14 million). However, the company’s dependable cash flows reduce its credit risk profile considerably. Standard & Poor’s upgraded the company from a BBB- credit rating in September 2015 to BBB, and Flowers also has over $320 million available at its credit facility.

Source: Simply Safe Dividends

Overall, we think Flowers’ dividend payment is very safe. Investors will be challenged to find a more predictable industry than baked foods, and Flowers is well positioned with leading brands and meaningful economies of scale.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Flowers’ Dividend Growth Score of 81 indicates that the business has stronger dividend growth potential than most stocks in the market. Management most recently increased the dividend by 9.4% and has grown the company’s dividend for more than 10 consecutive years.

Flowers’ dividend has grown at an 18% compound annual growth rate since 2004, and the annual payout increased from 9 cents per share to 57 cents from 2004 through 2015. We expect the dividend to continue growing at a mid- to high-single digit rate, about in line with earnings growth.

Source: Investor Presentation

Valuation

FLO’s stock currently trades at 18x forward earnings estimates and has a dividend yield of 3.2%, which is meaningfully higher than the stock’s five-year average dividend yield of 2.6%.

If nothing comes from the class action lawsuits, which could potentially disrupt the company’s funds available for acquisitive growth, we believe Flowers can continue growing earnings at a high-single digit rate.

Under these assumptions, the stock appears to offer annual total return potential of 10-12% per year. Compared to most stable companies in the consumer staples sector, Flowers’ valuation looks relatively attractive.

Conclusion

Flowers Foods, Inc. (NYSE:FLO) shares many characteristics with some of our favorite blue chip dividend stocks. The company competes in a large, fragmented market with recession-resistant products and a slow pace of change. Flowers also has a leading portfolio of brands and benefits from economies of scale. We think the stock is reasonably priced today and will continue delivering steady, growing dividends for many years to come.

Disclosure: None