Flowers Foods, Inc. (NYSE:FLO) is a reliable company in the consumer staples sector that currently offers a reasonable valuation, a safe 3.2% dividend yield, and above-average dividend growth potential.
The business has been very good to shareholders over the last decade as well. FLO’s stock delivered a 12.9% annualized return from 2006-2015, handily beating the market’s 7.4% annual return.
The company’s annual dividend payments also ballooned from 9 cents per share in 2004 to 57 cents in 2015, representing an 18% compound annual growth rate.
Among the funds followed by Insider Monkey, Flowers gained some popularity during the fourth quarter, as the number of investors long the stock increased by four to 21, while the total value of their holdings slid to $207.58 million from $221.97 million and represented around 4.60% of the company’s outstanding stock. Ric Dillon’s Diamond Hill Capital reported holding nearly 3.20 million shares of the company, which makes it the largest shareholder in the Insider Monkey database.
Flowers was founded in 1919 and has grown to become the second-largest producer of packaged bakery foods in the country with nearly 50 operating bakeries. The company primarily sells breads, buns, rolls, tortillas, and snack cakes, and some of its key brands include Nature’s Own (the number one bread in the U.S.), Tastykake, Wonder Bread, Whitewheat, and Dave’s Killer Bread.
Approximately 84% of Flowers’ sales last year were Direct Store Delivery, in which fresh products are delivered directly to consumers via a network of more than 5,000 independent distributors. Roughly 78% of this segment’s sales are made to retail customers (e.g. supermarkets, mass merchandisers), who sell Flowers’ bread, buns, and rolls under Flowers’ brands and their own store brands in some cases. The remaining customers are mostly restaurants and institutional businesses.
The remaining 16% of revenue is derived from Warehouse Distribution, which includes fresh and frozen products that are shipped to customers’ warehouses nationwide. This segment is almost equally split between retail and foodservice customers.
Bread is boring, but as Warren Buffett would surmise, boring can be beautiful. According to Flowers’ investor fact sheet, approximately 98.6% of households buy fresh packaged bread. Bread is also the number one grocery category in weekly true profits.
The products Flowers sells are going to remain relevant and in demand by practically every household in the country for many years to come. We like industries with a slow pace of change, and Flowers’ business certainly checks that box.
While there are seemingly few barriers to entry in the industry, Flowers derives several advantages from its longevity (the company is nearly 100 years old).
Flowers has built up a large handful of brands with strong recognition over several decades. For example, the company’s Nature’s Own brand was introduced in 1977 and has built a strong reputation by never using any artificial flavors, colors, or preservatives in its baked foods since inception.
With over $20 million spent on advertising each of the past three years, Flowers defends its market share in part due to favorable brand recognition with consumers. Smaller rivals don’t have the budget to build up competitive brand awareness.
Retailers also have strong relationships with Flowers and only have so much shelf space for the categories that the company participates in. As long as Flowers’ baked foods continue selling, there is little incentive for retail customers to give shelf space to unproven new entrants in the market, especially given the relatively low level of differentiation in a category such as bread.