Crisps-UTZ brand dividend growth investing

Will a dividend growth investor see good value in buying Utz brands today?

Utz Brands for the careful dividend growth investor

While UTZ is a recent arrival to the stock market (via a SPAC), the company has been rocking for many decades and has a stable of fabulous snacks and strong brands. How, then, does this stack up for a dividend growth investor looking for long-term appreciation and growing income?

Price at time of publishing: $14.61 on 2022-07-09.

Debt

The SPAC listing left the company with a reasonable load of long-term debt of 849.5m in Jan 2022, against revenues of 1,180m. This may burden the company, particularly with rising rates. This is something of concern with dividend growth investing – if the firm is saddled with long-term debt, how can they pay out more to shareholders?

Cashflow for the dividend growth investor

As a relative new-comer to the stockmarket, the company does not have a long history of growing dividends. However, it appears to have a shareholder friendly perspective on dividends, although the current expected DGR is sluggish and consists of a cent or two per year which is hardly exciting for the average dividend growth investor. It is possible that with time this may pick up, but the current yield of 1.48% is hardly anything to write home about. From the income perspective, this does not look like a dud but it is hardly exciting for an unproven option.

Valuation

The company presently trades at approximately 28x PE (Figure 1).

While there is anticipated to be strong future growth in the earnings (based on analyst estimates), of approximately 25% a year in 2023 and 2024, does this qualify the firm for such an extraordinarily high PE?  The long-term growth is expected to be only 6% pa for the next five years. This suggests most of the growth will be in 2023 and 2024 which is OK for the patient dividend growth investor.

There is certainly no margin of safety in this option. If the PE was to contract to 15x by the end of 2024, even with the strong expected growth, this would represent a loss of 16% or about 7% pa ROR (Figure 1). To my mind, this represents a risk when dividend growth investing.

UTZ forecasts near-term for the dividend growth investor
Figure 1. UTZ forecasts near-term for the dividend growth investor. Source: Historical Graph – Copyright © 2011-2021, F.A.S.T. Graphs™ – All Rights Reserved

There is one final consideration here. If we look at Figure 1 we can also see that the analyst expectations have been significantly downgraded from 6 months earlier. For example, the 2024 estimates were EPS of 1.18 6 months ago and now they are 0.79. This looks uncertain and not something I want to count on moving forward when dividend growth investing.

Thesis for dividend growth investing

As a snack and FMCG option, UTZ is a newcomer with no track record for dividend growth investing. There is an expectation of strong future growth in the coming years. However, the firm trades at a very high PE level at present, representing no margin of safety and a considerable risk of a sizeable loss if the PE contracts to a more reasonable 15x PE. As a consequence, I would rate this as a SELL or, if pushed, a HOLD with a very long time-frame (10+ years). Even in this case, I think there are far better options for long-term investors.

I would be more interested in the company at a PE of about 15, at $7.35. Yes, this is half of the current price. It would provide me, with my dividend growth investing mindset, with reassurance that declines would be more manageable and the dividend yield would not be unreasonable at approximately 3%.

Utz Brands for the careful dividend growth investor While UTZ is a recent arrival to the stock market (via a SPAC), the company has been rocking for many decades and has a stable of fabulous snacks and strong brands. How, then, does this stack up for a dividend growth investor looking for long-term appreciation and…

Utz Brands for the careful dividend growth investor While UTZ is a recent arrival to the stock market (via a SPAC), the company has been rocking for many decades and has a stable of fabulous snacks and strong brands. How, then, does this stack up for a dividend growth investor looking for long-term appreciation and…

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