Flowers Foods a High-Yield Risk Worth Taking


There are certain times when being a value investor also implies taking a contrarian approach. However, the terms “value investor” and “contrarian investor” are not always synonymous. On the other hand, when faced with a significantly overvalued marketplace like we see today with blue-chip dividend growth stocks, value investing and contrarian investing tend to become one and the same.

The simple fact is that when faced with a strong bull market, true fairly valued dividend growth stocks become very hard to find. In a strong market, value typically comes about for a reason, and that reason is typically associated with problems. However, the key to long-term investing success is when you find fair value due to a temporary problem, and not a permanent impairment of the underlying business.

Flowers Foods, Inc (FLO): Once Highflying Investor Sentiment Has Recently Turned Negative

The fairly valued dividend growth stock research candidate I am featuring in this article is Flowers Foods, Inc. The company was founded in 1919, went public in 1968, and through organic growth coupled with a series of acquisitions and divestitures, it has grown into the second largest North American bakery. As a dividend growth stock, Flowers Foods is a member of David Fish’s Dividend Contenders as it has raised its dividend for 15 consecutive years.

Flowers Foods has historically commanded an above market P/E ratio in the marketplace. However, since the end of October 2015, the company’s stock price has fallen approximately 43% from its then overvalued high. This precipitous drop in stock price has brought the company into what appears to be attractive valuation levels based on earnings and/or cash flows, and has pushed its current yield above 4%. Clearly, the stock has become unpopular, and I see two primary reasons why this has occurred.

The most significant reason, in my opinion, has been a significant slowdown in earnings growth to a mere 1% average rate since the beginning of fiscal year 2014. Prior to that time, Flowers Foods had historically grown earnings at an average of more than 20% per annum. (I will cover both of these results in more detail later.) This previously high rate of growth essentially explains its historical normal P/E ratio of 22, and the recent significant slowdown of earnings growth partially explains the current reset in its valuation.