Stock Market: Smaller Companies That Are Performing Well in Pandemic Times

We have several securities on the Recommended List of my Income Investor newsletter that I consider to be key holdings, especially during these difficult times.

Every income portfolio should own positions in companies like BCE Inc., Fortis, Emera, and TC Energy.

But there are many smaller companies on our list that may have been overlooked by investors, even though they are performing well in the COVID era. Here are three of them. Prices are as of July 8.

B&G Foods Inc. (NYSE: BGS)

Type: U.S. common stock
Current price: US$25.46
Annual payout: US$1.90
Yield: 7.5 per cent
Risk: Higher risk
Website: www.bgfoods.com

Comments: Most companies in the food business are doing well these days and this little-known American firm is no exception. The stock is up 42 per cent year to date, outperforming the indexes by a wide margin.

Net sales during the first quarter were up 8.9 per cent, to $449.4 million (figures in U.S. dollars), and the uptrend has accelerated since then. Sales in May came in at $160.1 million, an astounding increase of 50.5 per cent over the same period last year. The company expects net sales for the second quarter of 2020 to be in the range of $510 million to $525 million.

COVID-19 is a direct factor in these impressive results. CEO Kenneth G. Romanzi said, “The onset of the terrible COVID-19 pandemic and the resultant stay-at-home orders throughout the country drove significant changes in consumers’ lives requiring them to cook and eat at home. This drove a significant increase in consumption across our portfolio of brands beginning in mid-March that has continued into May. As a result, we had a very positive first quarter that was ahead of our expectations and have strong momentum entering the second quarter.”

The company produces a wide range of brands, the best-known of which are Green Giant and Cream of Wheat. Others include Back to Nature, B&G, B&M, Dash, Las Palmas, Le Sueur, Mama Mary’s, Maple Grove Farms, Ortega, Polaner, Spice Islands, New York Style, and Victoria.

Adjusted net income for the first quarter was $29.2 million ($0.46 per share, fully diluted), compared to $29.1 million, ($0.44 per share), for the first quarter of 2019.

Adjusted EBITDA was $80.7 million, an increase of $4.9 million, or 6.4 per cent, compared to $75.8 million for the first quarter of 2019. The increase was primarily attributable to the positive impact of the COVID-19 pandemic on the company’s net sales, as well as the acquisition of Clabber Girl in the second quarter of 2019. Adjusted EBITDA as a percentage of net sales was 18 per cent for the first quarter of 2020, compared to 18.4 per cent a year ago.

The stock pays a quarterly dividend of $0.475 per share and that hasn’t changed since June 2018. I don’t expect any increase in the near future, but the sales growth makes the financial position of this company more attractive. The 7.5 per cent yield says the market is still attributing elevated risk here but I like the general direction we’re seeing and recommend the stock to more aggressive investors.

Richards Packaging income Fund (TSX: RPI.UN)

Type: Income trust
Current price: $64.98
Annual payout: $1.32
Yield: 2.0 per cent
Risk: Medium
Website: www.richardspackaging.com

Comments: We recommend this security in February, but when the pandemic took hold shortly after, most readers didn’t pay much attention.

After all, the business didn’t seem very glamourous – glass and plastic manufacturing and distribution – and there were many more things to worry about.

So, what happened? The units took off, climbing to $64.98 from $45.29, for a gain of 43 per cent in less than five months. Why? A favourable movement in the Canadian/U.S. dollar exchange rate boosted returns on U.S. sales. But, more importantly, sales of healthcare-related products associated with combatting the coronavirus (such as sanitizer pump bottles) were up dramatically. Overall first-quarter revenue was up 33 per cent year-over-year, of which 25 per cent was organic growth.

“Earnings also were higher due to a favorable product mix and the lack of fixed cost on higher volumes without any price increases. As a result, net income was up $10 million, or $0.61 per unit.” commented CEO Gerry Glynn.

Actual net income for the quarter was just under $15 million ($1.03 per unit, fully diluted) compared with $4.6 million ($0.419 per unit) the year before. The payout ratio for the first quarter was 32 per cent, which means there is potential for an increase in the $0.11 monthly distribution.

This is a good news/bad news story. The good news is that the company is doing well, and we have enjoyed a healthy capital gain in a short time, despite turbulent markets.

The bad news is that the yield has dropped a full percentage point from the time of the original recommendation. However, the low payout ratio suggests we could see a distribution increase down the road.

Granite REIT (TSX: GRT.UN)

Type: Real estate investment trust
Originally recommended: Dec. 20/18 at $53.95
Current price: $72.18
Annual payout: $2.904
Yield: 4.0 per cent
Risk: Moderate
Website: www.granitereit.com

Comments: REITs as a group have been hard-hit by the COVID crisis. Retail REITs have seen their malls shuttered, office REITs have been hit by work-from-home rules, apartment REITs risk rent defaults. As a result, most have dropped in price.

But not Granite. It was spun out from Magna International in 2011 and owns the properties on which Magna’s plants were built. Management pledged to diversify to other industries, and it has been delivering on that promise. But the main reason the REIT has held up well is the high credit quality of its clients. In mid-May management reported that 99 per cent of its April rents had been paid and the May figure at that point was 95 per cent.

First-quarter funds from operations (FFO), a key measure of a REIT’s financial health, was $56.8 million ($1.05 per unit) compared with $40.7 million ($0.89 per unit) in the year before. Excluding one-time items, FFO for the quarter was $53.2 million ($0.98 per unit).

The REIT increased its monthly distribution in December to $0.242 from $0.233.

Granite continues to acquire properties even during the height of the pandemic. On June 3, it announced the acquisition of eight income-producing properties in the United States comprising approximately four million square feet at a combined purchase price of approximately C$332 million.

CEO Kevan Gorrie commented, “These acquisitions advance our strategy of acquiring and developing modern e-commerce and distribution facilities in Granite’s U.S. target markets. The properties are exceptionally well located in their respective markets, with close proximity to critical e-commerce infrastructure. Furthermore, the assets are being acquired at a competitive cost basis and provide an opportunity to enhance returns as several leases in the portfolio include below market in-place rents.”

The REIT has a strong balance sheet position with estimated pro forma liquidity of approximately $1.1 billion.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca

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