Flowers Foods, Inc. (FLO): Predictable Dividend Growth and a 3.2% Yield

Since product differentiation is generally perceived to be lower, maintaining an efficient production and distribution system is particularly important. As the second largest player in the market with just under 20% share (see below), Flowers derives several cost advantages.

Source: Investor Fact Sheet

The company enjoys economies of scale in purchasing its raw materials, mass producing its bakery foods, investing in efficient production facilities, and distributing its products.

Importantly, Flowers’ size has also helped it strategically locate production facilities near key markets, resulting in fresher products at the time of delivery and logistics cost savings. Many of its fresh products require frequent deliveries to keep store shelves well-stocked, which rewards suppliers with the densest and most convenient distribution networks.

Despite the company’s strong brands and economies of scale, its market is mature and has a low organic growth profile. As a result, Flowers has been consolidating the market for many years.

According to a recent investor presentation, the company has made more than 100 acquisitions since 1968. Flowers has made 14 acquisitions over the last decade that have added $2 billion in revenue, highlighted by its acquisitions of the Wonder Bread brand from Hostess Brands and the Sara Lee brand in California. Otherwise, Flowers has mostly focused on buying up regional baking companies in areas where it has not previously had much of a presence.

The largest player in the industry, Grupo Bimbo, has also helped consolidate the market. In 2011, it bought Sara Lee’s fresh bakery segment in North America.  The three biggest players in the industry now account for over half of the market, which has encouraged more rational pricing.

Acquisitions have also helped Flowers enter faster-growing segments of the market to stay on top of changing consumer trends. The company now claims to have the leading position in the organic segment of the $2.1 billion specialty/premium loaf category through its acquisitions of Dave’s Killer Bread and Alpine Valley Breads. These brands are expected to combine for 2016 sales of about $255 million at the mid-point of management’s guidance, representing about 6% of total expected revenue.

Overall, the company’s management targets long-term sales growth of 5-10% per year (organic 3-5%, acquisitions 2-5%), EBITDA margins of 11-13%, and double-digit EPS growth. Bread might be boring, but its investment potential certainly is not.