2023-04-17 23:34:34 ET
Summary
- Utz Brands is a USA-based company that manufactures a diverse portfolio of salty snacks through different brands.
- UTZ has an excellent growth track record and has the potential to be a solid dividend growth stock.
- Based on the Chowder number of 7.01% and the dividend grades used at the Seeking Alpha website, UTZ might not be a good dividend growth investment at this moment in time.
Investment Thesis
UTZ Brands, Inc. (UTZ) is a USA-based company that manufactures a diverse portfolio of salty snacks through different brands.
Because of its stable and recession proof business model combined with a history of continuous growth (100+ years!), UTZ has the potential to be a solid dividend growth stock. In this article I want to analyse UTZ stock from a dividend growth / valuation perspective, so you can decide if it deserves a place in your dividend stock portfolio.
Company Overview
The story of UTZ began in 1921 as a small family startup, and the company has a track record of continuous growth since then. They produce a huge variety of salty snacks such as: potato chips, tortilla chips, pretzels, cheese snacks, pork skins, veggie snacks and pub/party mixes.
Besides the brand “UTZ” the snack portfolio also consist of:
- Bachman
- Zapp’s
- Dirty
- Golden Flake
- Good Health
- Snikiddy
- Boulder Canyon
- TGI Fridays Snacks
- TORTIYAHS
Since 2010, UTZ has made a lot of acquisitions, making it one of the fastest-growing snack operators in the USA.
In addition to focusing on growth, UTZ also focuses on profitability. Based on the 2022 annual report UTZ will execute the following strategies:
One of the main catalysts are the so called “Power Brands”, which grew 17.4% year-over-year (2021 vs 2022). The Power Brands enjoy a combination of higher growth and margins compared to their Foundational Brands. As a result they will invest more in Power Brands. The increased focus on Power Brands is in my opinion a good thing, because this will lead into a more optimized and profitable portfolio in the future.
Quarterly results
The last quarterly results were well received. UTZ beats analysts’ expectations (EPS surprise of $0.03 , actual $0.15 vs consensus $0.12) and achieved an organic net sales growth of 15.9% with a 18% increase of net sales compared to the fourth quarter of 2021. This was mainly due to their increase in price/mix and acquisitions. They also managed to increase their adjusted gross-margins 2.2% versus their prior year. This was a result from their programs to enhance margins, such as:
- Cost synergies from acquisitions.
- Manufacturing efficiencies.
- Logistic network optimization.
- SKU rationalization.
It seems like UTZ is doing the right things to increase their margins. Especially the focus towards the Power Brands. I like the fact that they use SKU rationalization to evaluate their portfolio health so they know where to focus to further gain market share and/or lower their operational costs. This is in my opinion an essential step towards profitability, which leads to generating free cash flow.
Outlook FY 2023
UTZ expects a net sales growth of +3% to 5% and a +4% to +6% organic growth. The organic growth is led by price/mix and volumes, which is supported by increased marketing, innovation and continued distribution gains. They state that the volumes will be comparable to 2022.I think the estimates are on the conservative side, if they can manage to further expand their geographic presence, higher growth and an increase in volumes should be achievable. Also they expect a +6% to +10% growth in their Adjusted EBITDA, caused by a higher gross profit margin. This should help the company towards profitability to further expand their business and pay down debt or (potentially) increase their dividend.
Financials
Income statement
UTZ has managed to achieve rapid revenue growth over the past years. In fiscal year (FY) 2017 UTZ had a total revenue of $772 million and in FY 2022 it was $1408.4 million. Looking at the net income UTZ had a net loss of $30.5 million in FY 2017 and in FY 2022 it was $0.4 million. The only profitable year was FY 2021 with a net income of 20.6 million. However the trend goes more towards profitability.
Based on the numbers of Seeking Alpha gross profit Margin ((TTM)) is 31.46%, which is just as good as the sector median (31.37%). At the fourth quarter of FY 2022 UTZ has managed to increase the gross margins to 36.6%, which means it’s in an upward trend as well.
Balance Sheet
The balance sheet took the most of my attention, because each year their total debt is growing (FY 2018 $679.9 million vs FY 2022 $992.5 million).
In the Q4 2022 investor presentation they show that their Net Leverage Ratio is 5. This is based on normalized Adjusted EBITDA of $170.7 million and a net debt of $860.3 million. The Net Leverage Ratio is in my opinion a red flag, because it's based on Adjusted EBITDA. There is a possibility that the current Net leverage Ratio overstates the ability to pay down debt. At the moment the company isn't generating free cash flow, so currently there is no money which is free for debt repayment. However it looks like the company is aware of it. In their fiscal outlook for 2023 they want to achieve a net leverage ratio below 4.5x. UTZ has a S&P credit rating of B , this means: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. Personally I think UTZ has the capability to improve their financial health, because of their growth, improving margins, stable business model and their way to profitability. Also 70% of long-term debt is fixed at 4.5% via interest rate swaps and there are no significant debt maturities until 2028. Nevertheless, I will keep an eye on their upcoming quarterly reports what UTZ will do to bring down their debt.
Dividend
Analysing the dividend, the dividend grades from the Seeking Alpha website were used.
Dividend yield and growth
Since UTZ became a publicly traded company the board of directors has adopted a dividend policy. At the moment UTZ pays an annual dividend of $0.23 per share, which comes down a current yield of 1.29% . The current yield is fairly low compared to the sector median of 2.54%. Looking at the dividend history UTZ has a track record of 2 years consecutive dividend growth. In 2021 UTZ has increased its annual dividend by 8% and in 2022 the company had approved an annual dividend increase from $0.216 to $0.228 per share which is an increase of 5.5%. Every time when UTZ announced a dividend increase they said: “This increase is supported by the company’s growth since going public in 2020”. In my opinion this looks like a start of a dividend growth streak. However if we look at the 2022 annual report they don’t speak about a clear objective to pay a growing dividend, so there is some uncertainty to assume there is a dividend growth policy. Based on current profitability metrics won't be wise to increase their dividend a lot in FY 2023. If they will grow their dividend again I think it will be in line with FY 2022.
Dividend Safety
The dividend looks relatively safe with a payout ratio of 39.82% (based on non-GAAP EPS). I like the fact the payout ratio isn't too high, because UTZ need its earnings more to expand their business. Although, I think the dividend is less safe than the low payout ratio would suggests. In the ideal situation dividends should be covered with Free cash flow, which isn't the case at the moment. It would also give me the opportunity to compare the traditional payout ratio to the free cash flow payout for a better estimate of the dividend safety.
Valuation
Chowder Rule
For a dividend growth investor it’s important to find a good balance between the current dividend yield and dividend growth. To determine if UTZ can be a good dividend growth investment at the current share price I used the Chowder Rule . For those who don’t know, Chowder is a Seeking Alpha contributor who created a valuation metric based on the current dividend yield and the compound annual (dividend) growth rate ((CAGR)). The Chowder rule is easy to apply and it consists on 3 different variations based on the starting yield or sector. Following the Chowder rules, UTZ is a stock with a dividend yield less than 3%. According to this, the current yield + the 5-year CAGR must be higher than 15% in order to be labelled as an attractive investment. UTZ has only a track record of 2 years of consecutive dividend growth. Their annual dividend grew from $0.204 to $0.228 in that period, which comes down to a 2-year CAGR of 5.72%. The current dividend yield is 1.29% and if we add up 5.72% , this comes down to a score of 7.01%. This is way below the benchmark of 15%, which means UTZ isn’t an attractive dividend growth investment. The main disadvantage in this case is that the Chowder Rule is a reflection of the past. I think the best of UTZ is yet to come. If they manage to increase their top- and bottom line growth resulting in free cash flow generation, higher dividend increases can be expected. However, with a starting yield of only 1.29% it needs a lot of compounding to grow into attractive yield territory.
Other valuation metrics
Looking at some other valuation metrics we can see that the P/E non-GAAP ((FDW)) is 32.58. Compared to a sector median of 19.19 this is also on the high side. Despite the rapid growth, I think this P/E ratio cannot be justified. Also the EV/EBITDA ((FWD)) 16.84 is high compared to the sector median of 12.39. The results of the Chowder number, P/E non-GAAP and EV/EBITDA ((FWD)) correspond to the valuation grade of the Seeking Alpha website.
If UTZ can generate growing free cash flow, I will do discounted cash flow analysis ((DCF)) in the future to calculate the intrinsic value of the company. At the moment UTZ is more like a growth company and I think DCF might not apply.
Conclusion
UTZ is a company that operates in the salty snack space. Over the years UTZ has managed to rapidly grow their revenue and with their value creation strategies they're set to accelerate further top-line growth and enhancing margins. This should lead to higher profitability and free cash flow generation. However, the balance sheet shows some unhealthy signs with a net Leverage Ratio of 5. In my opinion it's necessary to bring further down their debt to make UTZ a safer investment. Based on the dividend grades and a Chowder number of 7.01%, UTZ doesn’t look like an attractive investment from a dividend growth/valuation perspective at the moment.
Personal takeaways
I think UTZ will be a dividend growth stock and has the potential to be a great long term investment. I own shares of UTZ myself but I would not recommend buying more shares at current prices. Fiscal year 2023 will be interesting and I hope UTZ can maintain its growth and enhance its profitability. From a dividend growth point of view you don’t have to be in a hurry buying shares of UTZ. Even as a dividend growth investor I hope UTZ will prioritise growth and reducing their debt. I have a very long time horizon (+30 years), so the current shares I have can compound nicely. I am convinced that the fundamentals of UTZ will improve over time and better buying opportunities will occur, so I give UTZ stock a Hold rating.
For further details see:
Utz Brands: A Dividend Growth Stock In The Making