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Tortilla Profits Lead Gruma to Mull Dividend: Corporate Mexico

Corn Transferred to Cart during Harvest in Malden, Illinois
Corn futures have plunged 38 percent in U.S. markets in 2013, cutting the price of the ingredient on which the company spends the most. Photographer: Photographer: Daniel Acker/Bloomberg

Gruma SAB, the world’s biggest tortilla maker, is handing shareholders the biggest gains in Latin America as surging profits lead the company to consider paying a dividend for the first time in five years.

Shares more than doubled this year as operating income rose 79 percent after Gruma increased prices and reduced 3,000 jobs. The San Pedro Garza Garcia, Mexico-based company used cash to reduce total debt 12 percent to 17.6 billion pesos ($1.4 billion), prompting Fitch Ratings to boost its credit rating this month to BB+, the highest since 2008. Corn futures have plunged 38 percent in U.S. markets in 2013, cutting the price of the ingredient on which the company spends the most.

The stock surged as the maker of Mission tortillas recovers from a 12.3 billion-peso loss in 2008 triggered by wrong-way bets on currency derivatives. Chief Financial Officer Raul Cavazos said in an Oct. 24 earnings call that Gruma plans to evaluate its dividend plans while curbing capital spending, with an investment budget of $150 million or less next year compared with about $200 million in each of 2012 and 2011.

“There may be some investors who won’t invest in Gruma because it doesn’t pay a dividend, and this could open the door for them,” said Miguel Mayorga, a Latin America food company equity analyst at Corporativo GBM SAB, which this month listed Gruma as one of its top nine stock picks for the region in 2014. “I don’t think they’ll pay during 2014, but it will surely be an important catalyst.”

Profit Focus

Cavazos said on the conference call that he wanted to continue reducing debt to restore Gruma’s investment-grade credit rating, and the company is planning capital spending ranging from $120 million and $150 million in 2014. The tortilla maker intends to bring the ratio between debt and profit to two-to-one, he said.

Gruma’s net debt to earnings before interest, taxes, depreciation and amortization, a measure of profit, fell to 2.65 at the end of the third quarter, the lowest in one year, according to data compiled by Bloomberg. Ebitda increased 48 percent from a year earlier to 1.7 billion pesos even as net sales in the third quarter rose less than 1 percent from a year earlier.

A Gruma press official declined to comment.

Marimar Torreblanca, a Mexico stock analyst with UBS AG, said in a phone interview from New York that investors have been impressed with Gruma “focusing on profitability rather than growth.”

Best Return

The company reduced its workforce to about 19,000 employees at the end of September, from 21,974 at the end of 2012, according to regulatory filings. The U.S. was Gruma’s biggest market in 2012, accounting for 37 percent of sales.

Gruma reduced selling, general and administrative expenses by 8 percent in absolute terms, “reflecting important reductions at most subsidiaries, which have resulted from companywide efforts to optimize marketing and administrative expenses as part of the strategy to enhance value creation,” according to an Oct. 23 filing with the U.S. Securities and Exchange Commission.

“They have changed their focus to high margins,” Torreblanca said. “They don’t care if they lose volume as long as they get better profitability on their investments.”

Gruma has returned the most among companies with more than $3 billion in market capitalization in Latin America’s five biggest equity markets, according to data compiled by Bloomberg. The return is about four times the average gain for a group of 16 companies worldwide that includes Gruma and comparable food producers.

Debt Repayments

While peers including Grupo Bimbo SAB slipped during the fourth quarter, Gruma advanced 35 percent, reaching a record 98.92 pesos per share on Dec. 23. Shares declined 0.8 percent to 97.86 pesos per share today at 12:28 p.m. in Mexico City.

Gerardo Copca, an analyst at Metanalisis SA, said that the pace of Gruma’s rally will probably slow next year, with the price ending the year at about 125 pesos.

“The multiples aren’t as cheap as they were at the beginning of this year and that’s really what helped drive the gains it’s had,” Copca said by phone from Mexico City.

Cavazos said on the October earnings call that Gruma had repaid 40 percent on the debt it took on to finance the repurchase of Archer-Daniels-Midland Co.’s 23 percent stake in the company. The tortilla maker paid down $93 million in debt in the third quarter, bringing the total reduction this year to $179 million, he said.

“Gruma before had a philosophy of focusing on growth without taking care of profit,” GBM’s Mayorga said in a telephone interview. “Now it’s controlling this growth to consolidate the businesses to promote profit.”

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