Premium Brands Holdings Revisited

Back in March (2013) we took a position in a Canadian food company by the name of Premium Brands Holdings (OTC ticker:PCBZF).  This is a company, like the majority of Canadian companies, that is unknown in the United States to the retail investor.  U.S. investors tend to think that U.S. companies are all there is to invest in–thus they generally ignore companies outside the borders.  Premium Brands was an income trust up into 2009 before converting to a corporate structure with the changes in Canadian tax laws rendering income trusts a less tax efficient organizational structure.

Premium Brands Holdings is a billion dollar food company (yes Billion) that works in a way that we absolutely love.  Not unlike B&G Foods in the U.S. Premium Brands scoops up smaller, generally regional, brands then rolls them into the parent company finding ways to move forward with a more streamlined, efficient organization across a larger swath of the county.  Canada is a large country geographically, but is thinly populated in many areas, so it takes a larger organization to take regional companies and expand their footprint throughout the nation—or into the United States.

Premium Brands operates businesses under bunches of brand names–not a one that I am personally familiar with as they are generally made and sold in Canada.  You can see their stable of products here.

On November 7th the company announced a .3125 cent/share dividend (6.2% current yield) and their quarterly and nine month results which were stellar. Revenue for the quarter was up 13.5%, and for the nine month period revenue was up 10.7%. Adjusted EBITDA was up about 10% for the quarter. Rolling 4 quarters free cash was up only a tiny bit over 2012—but it is adequate to put the dividend to free cash flow payout ratio at 54.7%—nicely conservative leaving room for a dividend increase in March 2014 (yes we think they will increase the dividend in 2014). We believe that as newer acquisitions are absorbed and expanded the free cash flow will expand further opening the way for annual dividend increases. The latest financials are here.

It needs to be remembered that most of the former Canadian Income Trusts which have converted to corporations remain committed to paying out a substantial and growing dividend stream to investors.  Premium Brands remains committed to this principal and a 6.2% current yield is nothing to sneeze at–all while maintaining a reasonably conservative 54.7% payout ratio leaving funds for reinvestment in new businesses.

As noted above in March, 2013 we bought a position in Premium Brands and thus far the shares are up 16.5% all while collecting an additional 4.5% in dividends (for 9 months) for a total return of 21%.  We believe that even at current levels this remains a good buy (although volume on the OTC bulletin board is EXTREMELY thin and limit orders must be used–and patience must be used while awaiting an order fill) and we are considering purchasing a bit more of this issue.