Many investors experience a dividend cut negatively. Understandable on the surface, as shareholders will pocket less passive income. However, from a business perspective, it can be the absolute right move. Not only that, it can even be the catalyst that marks the bottom of a long and painful share-price decline. Flowers Foods sliced its payout into thinner pieces — the stock, however, did not crash. It surged. Is now the time to have a look at the stock?
Important disclaimer: All content is for information, educational, and entertainment purposes only and does not constitute personal investment recommendations or advice, but the sole personal, highly subjective opinion of the author.
Summary and key takeaways from today’s Weekly
– Many processed-food companies are reluctant to cut their dividends despite strong operational headwinds.
– Flowers Foods did cut its payout two weeks ago — the stock jumped 15%.
– Nonetheless, and despite appreciating this move to free up capital for debt repayment, the underlying business remains heavily challenged while the valuations does not offer a high-enough discount.
After my last more high-level weekly about food stocks a couple of weeks ago (see here), this time I am discussing again one particular case — Flowers Foods (ISIN: US3434981011, ticker: FLO).
It is the US’ largest producer of bakery products (it has nothing to do with flowers).
In my view, it belongs to the group I have been quite negative about for a long time. As a processed-food producer, FLO has experienced all the same struggles like its bigger and better known colleagues: changing consumer tastes and habits, cost of living struggles, high leverage, margin pressure, outdated brands, competition from private labels, and, of course, what I call the “dividend burden”.
Many issues still persist — but the latter no more, as FLO recently cut its dividend.
Even though it was not unexpected, given that the yield had become extremely high before the slice, it was insofar surprising as the payout was still well covered by free cash flow.
This might not be the only confusing factor for some: Shares popped 15% after the dividend cut was announced, together with lackluster quarterly results. The opposite of what one would typically expect.
Let’s check the setup and explore what is baked into this stock.
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Important disclaimer: All content is for information, educational, and entertainment purposes only and does not constitute personal investment recommendations or advice, but the sole personal, highly subjective opinion of the author.
A Trendsetter?
Loyal readers of Financial Engineering not only know that I have a negative opinion on consumer stocks, inclusive of pretend defensive food companies.
It is also an open secret that I have been criticizing the in my view aggressive short-sightedness of many leaderships. Most businesses in the sector have been experiencing certain challenges for years now — some more, others less.
Nonetheless, and despite weak financial results, the go-to strategy remains to claim everything is fine, “innovating”, cutting costs, shrinking packaging sizes, hiking prices, hoping for a miracle, and potentially issuing more debt.
But under no circumstances touching the dividend.
Despite no turnaround in sight.
Despite bleeding volumes.
Despite high leverage.
Flowers Foods went the other way.
Make no mistake, the company has been under heavy fire, especially after it conducted a for its size big debt-financed acquisition that massively worsened its balance sheet. Which came on top of other operating headwinds we are going to discuss below.
FLO shares collapsed in an almost unprecedented way, falling back 20 years in time.
In that sense, it is sitting in the same boat.
But on another front, the company finally showed a reaction.
Two weeks ago, together with its truly weak first-quarter results, the company announced a 50% haircut for shareholders. As said above, it was not unexpected as the market has been pricing it in.
But it was done despite still being covered solidly by free cash flow.
What appeals to me is that the number-one reason mentioned was debt reduction — a wound I have been putting my finger into on many occasions.
Check. ✅
Personally, I consider this to be a great decision.
And not only me.
Usually, slicing a dividend is perceived negatively, especially among “defensive businesses” with “reliable payouts” and “long track records”. Adding some fuel to the fire, Flowers Foods, according to their website (see here), has not cut its dividend for at least a quarter century on a split-adjusted basis.
FLO stock jumped 15% from, what it looks like in the short-term, a potential bottom.
So fine, so good.
Of course I will not celebrate prematurely.
Attentive readers will have instantly realized that if this were such a great opportunity, the name would have likely made it into one of my member-exclusive reports.
But it didn’t.
Despite applauding the dividend cut, I am not fully convinced about this story.
Flowers Foods is producing and selling processed and packaged bread, bagels, and related products, mainly via supermarkets. Last year’s big acquisition of a company called Simple Mills added the field of cakes and snacks. It sounds like an unhealthy combo, but there’s also some “healthier sins” component to it.
Traditional bread loaves, have been under pressure so that FLO bought Simple Mills not only to diversify, but also to add a growth component. And not just through the one-time transaction, as Simple Mills has been showing stronger results than the core of Flowers Foods.
Below, we can see how sales growth has eroded and flipped negative.
The “return to growth” is from the deal, not organically. But for now, it at least looks good and promising.
From a high level, the situation is not much different compared to other producers of processed and packaged food.
Branded products are under fire.
On one side due to inflation and private labels eating their lunch. But also for the fact that input costs cannot be fully passed to consumers, and in the case of bread specifically, organic demand having been in decline. Whether you “blame” healthier living and dieting in general or GLP-1 drugs in particular suppressing appetite, people are eating less bread.
I can confirm it from myself. While growing up, I often ate bread for breakfast, but definitely had it in my lunchbox for school and later also on the campus. For dinner in the evening, not seldom there was also bread on the table. Today, there are days where I don’t eat any bread at all — and no, I am neither hungry nor a victim of any of these “wonder drugs”.
Not necessarily representative, but in my view this bread-to-every-meal habit has changed. The more so, the younger the people looked at are.
And accordingly, Flowers Foods has been struggling.
The following slide from the latest earnings presentation shows top-line growth of 1.1% which sounds solid. But it is below inflation, and more important driven by last year’s acquisition. The framed table shows clearly that the company did aggressive price hikes of +4% for its branded products — while volumes in this category fell 4.2%
In other words, the core is rotten.
Despite reported top line growth, the reality is that below that it does not look good.
To better understand it, a look at volume developments is essential.
Below, we have total company volumes, branded retail, and other. The first two are key, and they are not only declining, but have reached a new low each over the last quarters.
In other words, downward pressure has even intensified.
A layer below, the next two slides show that the company has been losing market share in a challenged market (not a good combo by the way) in private labels…
… but also in branded products.
The given reason is inflation, but in my view it is a myriad of reasons sketched above — and not just inflation. It is clearly a downward spiral the company is in.
Putting both categories together, we can see that Flowers is losing ground.
In the acquired cake segment, there is some growth, and the company has also been gaining share. Nonetheless, this part alone is too small to move the needle in the other direction. It is only slowing down the decline for now.
That’s why management announced a few measured like pushing more towards organic, and cleaner and less ingredients amid more health-conciouss consumers.
The thing is, if people eat less bread, I am not sure this will be the solution.
And, less processed comes along with shorter shelf life. Combined with people eating less bread, the consequence should be smaller packaging and accordingly lower volumes. I am aware of new products like high-protein bread etc, but this hasn’t been the ultimate solution either.
Time will tell, but it does not look like a turnaround.
Turning now to debt, this part looks more scary than it actually is. With the dividend-cut announcement, management committed to lower leverage. Per last count, FLO hat 1.7 billion USD in net debt and barely any cash in the books.
Roughly 400 million USD need to be refinanced in the short term during 2026.
The refinancing will likely happen at much higher rates compared to the 3.5% that the maturing bond has. My guess is management will repay a portion from the dividend savings so that I am not concerned about higher total interest expenses. The remainder could be shouldered over the next year.
I think so because free cash flow is around 300 million USD.
After the cut, the dividend will consume a bit more than 100 million USD, so that theoretically up to 200 million USD would be available for deleveraging —assuming no sharp collapse in cash generation.
By the way, the reason why FCF looks so strong and seems to be growing is massively reduced Capex. This is not organic strength, and from here on I expect FCF to start declining again.
The rest of long-term debt is due only in 2031, 2035, and even 2055 — no immediate pressure. In that sense, I think the debt situation is manageable, at least in the short to medium term.
But it doesn’t change the fact that the core business is struggling.
Fresh packaged breads accelerated their decline, especially on the volume side. Without volumes they can twist as much as they want.
And surprisingly, the big hope, cakes, too, flipped into a unit-sales decline.
Pricing kept up the average, but volume was weak last quarter.
You see, it is a mixed bag — with a strong negative touch.
While the shift in focus from dividends (that still remain too high for my taste) to debt shows a good intention, my view is that this is not aggressive enough. Leverage ratios will only fall marginally, at best, if the business continues to deteriorate.
Looking at the valuation, the stock does not look expensive. A forward PE (that ignores debt) of 9.5x is not much. But on an EV / FCF basis, I have issues calling this one cheap or attractively priced. An EV of 3.5 billion USD versus free cash flow of 300 million USD — not unlikely under pressure — results in a multiple of 11–12x.
This still implies some very modest growth.
Growth that is hard to spot.
Even if they repay some debt, which will likely not be much, the valuation only marginally falls — when top line growth flips negative, and ultimately free cash flow generation.
In that sense, I would be comfortable in calling this one (optimistically) fairly valued. I can imagine that due to the high short interest of almost 20% of shares sold, the stock could jump occasionally, even without major operational improvements.
But I do not see a favorable risk and reward.
I see many real risk and unresolved issues — at a price that does not offer a high enough discount.
Speaking of discounts, the company has been operating in a strongly promotional environment, and still lost market share.
That’s why I m fine to have an eye on it from time to time.
But not more.
Conclusion
Many processed-food companies are reluctant to cut their dividends despite strong operational headwinds.
Flowers Foods did cut its payout two weeks ago — the stock jumped 15%.
Nonetheless, and despite appreciating this move to free up capital for debt repayment, the underlying business remains heavily challenged while the valuations does not offer a high-enough discount.
Important disclaimer: All content is for information, educational, and entertainment purposes only and does not constitute personal investment recommendations or advice, but the sole personal, highly subjective opinion of the author.
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