FLO - Flowers Foods: Serving Up Tasty Dividend Treats

Summary

• Flowers Foods has core brands that resonate with consumers and has a strong track record of growth.
• It's innovating into the snack category and is working to drive growth in premium brands.
• I also highlight the dividend, outlook, valuation, and make a recommendation.

I'm all for investing in beaten-down stocks with near-term difficulties but good long-term prospects. For example, this was the case for a number of midstream companies back in 2020, when market fears of a prolonged recession drove pricing down to historical lows, only to see a solid bounce thereafter, when the market realized that their steady fee-based income flows were safer than originally thought.

However, not all beaten-down stocks spell opportunity, as it's important to check under the hood for signs of long-term impairment. Such may be the case for emerging technology companies that are at risk of being disrupted themselves or having their market share eaten up by the big boys.

That's why it may be a better idea to have a portfolio of economically resilient companies whose products strongly resonate with consumers in both good times and bad. This brings me to Flowers Foods ( FLO ), which produces familiar products that millions of consumers love. In this article, I highlight the merits of FLO and whether the stock is currently a buy, so let's get started.

Why FLO?

Flowers Foods is based in Thomasville, GA, and is one of the largest producers of packaged bakery foods in America, generating $4.7 billion in sales over the trailing 12 months. Its bakeries around the country produce a number of well-recognized brands, including Wonder Bread, Nature's Own, Dave's Killer Bread, Canyon Bakehouse, and Tastykake.

A key advantage for Flowers Foods is its strong distribution network. The company has a broad reach, with products available in more than 60,000 retail and foodservice locations across the United States. This extensive distribution network provides a significant barrier to entry for new entrants.

Flowers Foods has also been actively investing in its business to drive growth. This includes initiatives to improve efficiency and productivity, as well as investments in new product development and marketing. This has supported a strong track record of growth. As shown below, FLO has grown its revenue by 57% over the past decade, all while maintaining a resilient EBITDA margin, which landed at 9.7% over the trailing 12 months.

This growth includes the last reported quarter, during which sales grew by an impressive 13% YoY amidst a challenging economic backdrop. This has led consumers to down trade into lower-cost private label products, as FLO saw a 100 basis point market share gain. Importantly, management is fighting to maintain healthy margins despite the shift to private label, as growth in this category was driven more by price increases than unit volume growth.

Moreover, FLO is facing a competitive environment, which has resulted in the company's super-premium Dave's Killer Bread brand losing a bit of unit share. This has resulted in higher media and advertising, digital, and social campaigns to make sure the brand is in front of consumers. Given these headwinds, I would expect for FLO's margins to be pressured at least in the near term.

Nonetheless, I see the long-term story as being intact, as supported by continued brand innovations and entry into the snack market. Plus, FLO is seeing strong traction in the cakes business, and expects this strength to continue this year, as highlighted during the last conference call :

As far as tracked channels go, the traction picked up in all of our cake business. So internally, sales were up substantially, and profitability is also up as well. So we are starting to see that margin improvement mesh that we've been working on for several years. And because of that and because of the stabilization that we've achieved, at Navy Yard in particular, we will start turning our attention back to actual growth.

Looking forward, we are focused on maintaining our momentum through increased investments in innovation and marketing. By leveraging our leading brands, we believe that our agile innovation initiative will expand our revenue streams beyond the traditional bread aisle. The nationwide launch of Dave's Killer Bread snack bars in 2023 is just the first step in this process.

Meanwhile, FLO maintains a strong BBB rated balance sheet and pays a 3.1% dividend yield that's well-covered by a 39% payout ratio. It also has a respectable 5-year dividend CAGR of 5.4% and 9 years of consecutive dividend growth.

Turning to valuation, I find FLO to be soundly valued at the current price of $28 with a forward PE of 21.8, which sits above the 18 to 20x range that I find fair for most well-run consumer staples companies. Analysts also don't forecast strong bottom line growth, with the expectation of just 3% to 4% annual EPS growth over the next two years. As such, I would find FLO to be more attractive after a 15%+ drop in price, which translates to a price of $23.80 and a forward PE of 18.5.

Investor Takeaway

Flowers Foods has an impressive track record of growth and is well-positioned for the future with momentum in the cakes business and innovations in the snack category. However, it's facing competitive pressures and consumer downtrading in the near term, which may pressure bottom line growth.

Moreover, its current valuation is likely a bit too rich for my taste, given expectations of only moderate bottom line growth in the near future. As such, I would recommend holding off on layering new capital into the stock until the share price drops to a level at which I find it more attractive.

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