Bob Evans Sale Produces Special Dividend

 | May 03, 2017 | 12:00 PM EDT
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After years of activist involvement, and some investors seeing potential value but unsure whether it would ever be unlocked, there's a new chapter unfolding in the Bob Evans Farms (BOBE) story. The sale of the company's restaurant chain to Golden Gate Capital for $565 million, and the purchase of Pineland Farms Potato Co. for $115 million, are complete. The company, which was best-known for its casual dining restaurants, will now focus solely on its prepared-foods business.

One of the most interesting aspects of this transition from an investor perspective is the use of the proceeds from the restaurant sale. Besides paying down debt, the company is also paying a $7.50 special cash dividend per share in mid-June. That represents nearly $150 million that will be returned to shareholders. BOBE has a decent history as a dividend payer, having paid dividends for more than 30 years, and with a current nine-year streak of increases. (In addition, the company has reduced shares outstanding by nearly 35% over the past six years via stock buybacks).

This significant return of cash, which is 11% of the current stock price, puts shareholders in the driver's seat. They can do what they want with the cash, whether reinvest it elsewhere, spend it or plow it back into BOBE shares if they believe the company will prosper as a prepared-foods provider.

BOBE shares are up about 85% in the past nine months and now trade at an all-time high. At a time when the restaurant space is overpriced (in my view), competition is fierce and some chains are facing extinction, BOBE picked a great time to get out of the business. Of course, the decision was driven by an activist, Sandell Asset Management, which continued to pressure the company into action after winning four board seats in 2014, subsequently having its proposal to separate the company's restaurant and prepared-foods businesses rejected in 2015, reducing its stake, and then re-engaging last summer.

Where BOBE goes from here remains to be seen. With all of the excitement around the restaurant sale, shares trade at about 27x next year's consensus earnings estimates and 23x 2019 estimates, not exactly cheap. It is a rather small consensus, however, with just three analysts weighing in.

Admittedly, I've been sampling the company's prepared foods, and have been impressed so far. Our teenage son thinks BOBE's macaroni and cheese is better than the competition (I won't name names), for whatever that's worth. Despite the stock run-up, and excluding the special dividend, BOBE currently yields 2%, and the company said it expects to continue paying a dividend.

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