Almost a Utility - Flowers Foods - FLO

It is time to get back to looking at individual companies.

I can make a strong argument that you should own FLO rather than any utility stock. FLO is a $5 billion company with a 20%+ share of the US bread industry. That share is 30%+ in the Southeast and Southwest, and as little as 5% in the Midwest. Their brands are Wonder, Nature’s Own, and Tasty Cake.

The basic idea of a utility is to collect a 4% to 5% dividend yield, and hope earnings can grow 4-5% annually, even though you are paying out about 50%+ of your net income to shareholders. The problem is that a utility has to beg and plead with a bunch of faceless bureaucrats in the state capitol if they want to grow. With the spread of populism, it feels like the tenor of these rate discussions is increasingly hostile. Forcing utilities to build wind and solar is a prescription for disaster.

FLO’s plan is to grow sales 1-2% a year, inch up margins so EBITDA grows 4-6%, and then hope that acquisitions and buybacks can help EPS grow 7-9%. Let’s think about FLO’s plan. Bread sales are very stable. FLO has actually been exiting markets where there share is low, the key is they are not trying to grow the top line, but they are trying to grow the EBITDA line. FLO has been trying to grow in categories like organic, gluten-free, and even breakfast bars, while exiting some less profitable areas. This is not rocket science, but it seems to be working. FLO has also had a good history of making small bolt-on acquisitions and there are not many venture capital firms trying to buy bread companies.

The former FLO chairman George Deese started as a bread salesmen in the 1960’s, and built FLO along with the current chairman Ryals McMullian. They each own 2 to 3 million shares. That $50-60 million spends pretty good in Thomasville, Georgia. This is not a company that will be making silly acquisitions. Management and shareholders are “well aligned”.

FLO has a 4% yield, and sells at 18x earnings, my favorite utility EVRG has a 4% yield and sells at 15x.

Another positive factor is Wall Street does not understand, and/or care about, FLO. FLO has only 1 buy recommendation, and 6 sell/holds. FLO has been a long-term holding of the well managed T Rowe Price Mid-cap Value Fund.

Obviously the market is willing to pay up for stability. In the “olden days” 5% growers sold at 10x earnings, but not today, that CONSISTENT slow grow is now worth 15x or more.

FLO is not one of my top 20 stock ideas. If you must have yield, I prefer Kinder Morgan, Nutrien, HF Sinclair, Nexstar, or Rayonier. I think my guys can grow faster than 5-6%.

But if you want to buy a utility, I would think about FLO first. I think the Georgia boys can slowly grow FLO at 5%, while only God knows what crazy thoughts are in the minds of members of the Missouri Public Utility Commission.