Pinnacle Foods Inc (NYSE:PF) was set for the third-largest IPO this year, yet it’s not in notoriously ‘bubblicious’ industries like technology or 3-D printing. In fact, it’s just your average, ordinary food producer. Investors considered the $551 million IPO under-priced, as shares of Pinnacle Foods advanced to $22.50 per share from an IPO price of $20 per share.
What investors see in Pinnacle Foods
The company has a dominate position in the food category, owning well-known brands like Duncan Hines, Van de Kamp’s, Log Cabin, and Mrs. Butterworth’s. Each time you go to the grocery store, you undoubtedly add to this company’s sales.
While Pinnacle Foods Inc (NYSE:PF) has faced flattened revenue growth — sales are about $2.4 billion per year, based on data obtained from the S-1 — it has managed to show robust growth in adjusted net profits, which are up to $113 million from $60 million, and adjusted free cash flow, which swelled to $186 million in the most recent year.
What really allures investors is the company’s excellent dividend. Pinnacle Foods Inc (NYSE:PF) pays a quarterly dividend of $0.18 per share, which works out to an annual yield of 3.2% with the stock trading at $22.50 per share. The company pays out roughly 50% of its net income in the form of dividends, and will continue to do so, stepping up the quarterly dividend to shareholders with growth in net income.
Why food is hot
Food stocks are an abnormally hot commodity. In recent weeks, Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) and private equity investor 3G Capital announced plans to acquire H.J. Heinz Company (NYSE:HNZ) in a deal valuing the company strongly for its free cash flow generation and ability to generate solid returns on invested capital.
Over time, food stocks and consumer staples as a whole tend to deliver stellar returns from a combination of lofty dividend yields and inflation protection. Strong brands tend to pass on inflationary pressures to the consumer via higher prices, insulating leading companies from the risk that food inflation outpaces earnings growth.
Pinnacle Foods Inc (NYSE:PF) makes for a great way to latch onto the growing demand for consistent dividends in the consumer staples space. The company offers a dividend yield greater than other leading consumer-staples stocks like The J.M. Smucker Company (NYSE:SJM) and General Mills, Inc. (NYSE:GIS), which offer dividend yields of 2.1% and 2.8%, respectively.
There’s also room for growth, as Pinnacle Foods’ dividend is tied to its net income, a set up for robust dividend growth over the long haul.
General Mills, Inc. (NYSE:GIS) makes for an interesting comparable on the dividend front. The company generates nearly one-fourth of revenue from its slow-growing, highly-competitive cereal business. In a shaky economy, price competition leads to buying down, as customers are lost to less expensive, private-label cereals. Cereals are arguably one of the easiest categories for a customer to “cut back” to save money.
The J.M. Smucker Company (NYSE:SJM) suffers from premium competitors, especially in the coffee space. Companies such as Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), which owns the Keurig single cup brand, challenge Smucker’s position with Folgers’ coffee.
Pinnacle Foods’ products are in the value category. While its brands are household names, they serve neither the top or bottom of the market, making them a beneficiary of buying down. Likewise, when the economy improves, Pinnacle Foods Inc (NYSE:PF) also benefits as consumers move up to known brands.
There’s upside potential, as well. As the company pays down debt it incurred when it was sold by The Blackstone Group L.P. (NYSE:BX), free cash flow will only grow. There’s reason to believe that the now-public company will be able to refinance much of its debt at lower rates when senior notes mature between the years 2014 and 2018.
Additionally, Pinnacle Foods Inc (NYSE:PF) could be a future candidate for another private equity takeover or acquisition from a larger strategic, which could allow it to use distribution synergies to edge out larger profits from each dollar in sales.
The company raised $580 million in its IPO, which will be used exclusively to pay down debt, helping the firm put a dent in its $2.5 billion long-term debt, according to the S-1. For investors seeking a potential play in the food space, this new IPO is worth another look. Its dividend policy ensures that investors will participate in earnings growth as dividends rise along with the bottom line.
The article This Food Stock Enjoys a Healthy Appetite for Dividends originally appeared on Fool.com and is written by Jordan Wathen.
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