“CD-Dependable 14.5% Yield” — It’s a Bond … No, a Stock … No, it’s an EIS!

By Travis Johnson, Stock Gumshoe, January 14, 2009

Everybody loves a good dividend, no? In that case, the promise of this teaser ad from the folks at High-Yield Investing might get the blood boiling a little bit …

“High-Yield Superstar … Unique Stock/Bond Hybrid Offers a CD-Dependable 14.5% Yield”

First of all, to make sure that there is no mistake, if you really believe that this yield is “CD-Dependable” then I’ve got some shares of Citigroup that you might like to buy … only $50 a share. CDs are insured by the FDIC and will never lose money (unless you consider inflation, or some kind of apocalypse that leads the US to abandon FDIC insurance or worse). This investment could easily lose money.

But that doesn’t mean it’s not enticing … we hear some more:

“What if you could enjoy the best of both worlds? Higher than average stock dividends combined with the regularity of bond interest payments rolled into one investment. Well now you can.

“This investment hybrid combines shares of an issuer’s common stocks with its bonds. They’re called Enhanced Income Securities (EIS) and you can easily buy and sell them on the U.S. stock exchanges. You get current income now… along with a built-in inflation protector in the stock’s capital gains.

“The beauty of this yield hog is that you can depend on its income stream, which is as reliable as a CD. That’s because EIS issuers are required to distribute a stated percentage of their cash flow to shareholders. You can count on its income stream and still enjoy the upside growth potential of a stock. It’s perfect for long-term income investors.”

So that’s more or less what an “EIS” is — they’re also sometimes called income participating securities (IPS) or income deposit securities (IDS), and probably other names as well.

These investments have only been around for a few years, they rose in popularity for a very brief while back when US investors were looking with lust at Canadian Income Trusts and wishing for more high-yield investments here at home. I know of only four of these securities, one of which is the one being teased today.

According to the ad, “we have the perfect one in mind — offering stable double-digit yields in one of the safest industries NOT affected by economic downturns…”

“A Full Plate of Delicious Double-Digit Yields and Capital Gains!

“The company issuing this EIS is a food manufacturer. Brand image is the name of the game in the food industry, and this company has a few of the biggest brands around. I bet you have had one of their most famous brands for breakfast… or enjoyed their wide variety of snacks… or dined on their line of Mexican foods. A famous chef manufactures his seasonings through them. Wal-Mart is their biggest customer.

“Quarterly dividend payments come in at close to $0.39 a quarter. About half is designated as bond interest, the other half as stock dividends. That gives this unique security a 14.5% dividend yield at current prices.

“Combine that robust cash flow with strong capital appreciation and it’s a flavorful one-two punch of profits wrapped in the safest industry on earth. Returns like these are especially sweet in these recent economic upheavals.”

So what is it? Thinkolator sez …

B&G Foods (EIS ticker is BGF, common stock ticker is BGS)

This is a manufacturer of shelf-stable food products, primarily for grocery stores — their biggest two brands that might be recognizable are probably the ones teased in the ad, Cream of Wheat and Ortega, but they have a dozen or two other lines of products, largely stuff that’s never really advertised like beans, sauces and such, though they do also make a line of Emeril products (not sure if that’s good or bad, he seems to have used up more than his 15 minutes of fame already).

An Enhanced Income Security is essentially the combination of a high yield stock with a high yield subordinated bond — so each share of BGF represents one share of the common stock, which itself has a high yield and a policy of distributing essentially all of their free cash flow as dividends, and $7.15 of principal on a bond that yields 12%. When these units were sold to the public they had a $15 asking price, and they’ve fallen to about $10 now.

Currently the stock half of the security has a dividend of .68 a year and a share price of about $5, meaning that the yield just on that common stock is 13.5%. The company recently cut the dividend to this level, and they’ve said that they hope investors consider the dividend to be sustainable. I’d hope so, too, but of course the market is telling you that it has some qualms on that front — you don’t get a 13% yield if the market is confident in your ability to keep paying that dividend ad infinitum.

At a current share price of $10.67 for the enhanced income security of B&G Foods we can just do the subtraction and determine that the bond half of this unit is valued at about $5.50. The yield was 12% on the original principal of $7.15, but at the reduced-by-the-market principal of $5.50 the yield is, of course, much higher. The interest payments on this bond, which unlike the dividends are not adjustable and cannot be ceased (unless they go bankrupt or something, of course) total about .86 per share, which would give a yield on this bond of close to 16%.

Overall, the combined security gets a yield of almost exactly 15%. Much of the dividend from the stock half of the security gets treated as return of capital, since it’s a payout based on free cash flow but is significantly higher than their recent reported earnings, so that might be tax advantageous for some people. The bond half (more than half now) would be treated as regular income. You could, of course, also buy the stock itself, but you get somewhat less security since the debt is senior to the equity in any bankruptcy filing, and since the debt interest should continue to be paid regardless of the level or consistency of the common stock dividend, which might provide some backstop to the shares even if the company doesn’t end up getting into significant financial difficulty (if the dividend stopped, the interest income on BGF would still get you something like an 8% effective yield).

The company carries a lot of debt, some of which is represented by these enhanced shares, so there may well be extra risks for them, but they’ve also claimed that they believe they sell “comfort food” and good, inexpensive eat at home options (like taco kits) that should see improving sales in a weak economy. Don’t know if it will be a good match for you, but it is at least interesting to consider. The original prospectus for the shares is here if you’d like to learn more about the way these shares are structured.

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