Recent Buy – FLO

With November is approaching fast, my rental property is now listed  for rent. I’m no longer as cash crunch as I allow myself to recoup after weddings, traveling, remodeling, etc. So, I’m back to shopping for dividend stock again. Let’s get started, shall we?

What is FLO? In short, it’s a bread company that has been around since 1919, 2 years short of 100 years.

From Yahoo:

Flowers Foods, Inc. produces and markets bakery products in the United States. It operates through two segments, Direct-Store-Delivery (DSD) and Warehouse Delivery. The DSD segment produces and markets fresh bakery foods, including fresh breads, buns, rolls, tortillas, and snack cakes. This segment offers its products under the Nature’s Own, Wonder, Whitewheat, Cobblestone Bread Company, Tastykake, Home Pride, Merita, Dave’s Killer Bread, Country Kitchen, and Roman Meal brand names, as well as markets franchised and licensed brands, such as Sunbeam, Bunny, and Holsum. It operates 39 bakeries, as well as sells its products through DSD route delivery model to retail and foodservice customers. The Warehouse Delivery segment produces snack cakes, breads, and rolls for national retail, foodservice, vending, and co-pack customers. It operates 10 bakeries. This segment markets its products under the Mrs. Freshley’s, European Bakers, Broad Street Bakery, and Alpine Valley Bread Company brand names. The company was formerly known as Flowers Industries and changed its name to Flowers Foods, Inc. in 2001. Flowers Foods, Inc. was founded in 1919 and is headquartered in Thomasville, Georgia.

Why Buy?

It’s a consumer stable company, I’d like to own one on my profile. I bought it because it is 50% off from its 52-week high, dividend yield is 4.23%.

What are the risk? Why it’s down 50%? 

Well there are several problems according to this one article from Yahoo.

A key reason for this move has been the negative trend in earnings estimate revisions. For the full year, we have seen 4 estimates moving down in the past 30 days, compared with no upward revisions. This trend has caused the consensus estimate to trend lower, going from $1.01 a share a month ago to its current level of 91 cents.

Also, for the current quarter, Flowers Foods has seen 4 downward estimate revisions versus no revisions in the opposite direction, dragging the consensus estimate down to 22 cents a share from 26 cents over the past 30 days.

What were the true reason? In short, food trend has changed to organic and gluten free. Carbs is now the new obesity enemy (despite the fact that you need carb to live). On top of that, there are several class action lawsuits. These factors affecting margins. Hence, the stock is down.

Let’s look at this short article from Fools

The problems, however, are twofold. First, the company’s legacy breads like Wonder Bread are falling out of favor fast. Between a movement toward organic food (which Flowers is involved in via acquisition) and toward gluten-free food, the trends are decidedly against the company.

Furthermore, the company’s drivers are asking to be recognized as employees, instead of independent contractors. They have initiated a class action lawsuit, and the U.S. Department of Labor has announced that the company will go under a Fair Labor Standards Act compliance review.

Even though Flower’s dividend is pretty safe — only 60% of FCF has been used to pay the dividend over the past year — I would be extremely cautious here. Its distribution model is what makes Flower so profitable, and if the drivers are taken on as employees, that could destroy the company’s margins.

Why still buy?

Bread is falling out of flavor, the company needs to overhaul its product. Change or to be bought out. It may takes sometimes, but talking about a company that has been in business since 1919, I’m confident that management will steer the ship to the right direction in time.

1. Phillip Morris. People don’t want to smoke anymore, they produce ecigarette. 😛
2. AT&T: people don’t want to stick to landline, they want to move around while talking on the phone, they bought satellite signals, buy a couple of cellular company, even buying the Dish business so they can get people hook on TV.
3. Dominion – Coal was hurting the environment, causing cancer to miners… they continue to switch to nuclear, wind turbines and hydroelectric plants.
4. Divhut pointed out McDonald’s has been rolling out healthy options.
5. Look at Olive Garden overhauling their pasta menus with half of the portion is ready packed to go home, because people like the feeling of didn’t finish their whole meal, still feel full and have left over for lunch the next day. Cool, eh?

All of these company are old, and they are all adative and  receptive to change. So I’m pretty sure the company will make the appropriate change to stay competitive and boost the demand.

Class action lawsuits – The company probably have to decrease dividend if cashflow fall short due to increase cost if drivers went from “contractors” to “employees”, a handful federal security law violations. Yikes!

A couple of my fellow dividend investors also see FLO as value right now:

A Frugal Family’s Journey,  Captain Dividend (he bought it 4 times Here, Here ), Dividend HawK, I Want to Retire Soon

The above mention bloggers are better at market timing than I do. LOL 🙂 I bought these share at a higher price, but in the end, I’m holding out for dividends longterm, so it’s alright. Thank you guys for the analysis.

What do you think about FLO? Are you going to make a buy or wait for it to be in the single digit before making your buy?