Up to date on October 1st, 2021 by Bob Ciura
Lancaster Colony (LANC) has a dividend observe document that few firms can rival. The corporate has elevated its money dividend for 58 consecutive years, making it one among simply 13 firms within the U.S. with that lengthy of a streak. This places the corporate among the many elite Dividend Kings, a small group of shares which have elevated their payouts for no less than 50 consecutive years.
You’ll be able to see the total listing of all 32 Dividend Kings right here.
We now have created a full listing of all Dividend Kings, together with vital monetary metrics equivalent to price-to-earnings ratios and dividend yields. You’ll be able to obtain your copy of the Dividend Kings sheet (together with monetary metrics equivalent to price-to-earnings ratios and dividend yields) by clicking on the hyperlink beneath:
Dividend Kings are the “better of the most effective” with regards to rewarding shareholders with money and better dividend payouts annually. This text will focus on Lancaster’s dividend and valuation outlook.
LANC started its operations again in 1961 after a number of small glass and associated houseware manufacturing firms mixed. The brand new firm virtually instantly started rewarding its shareholders with quarterly money dividends and finally went public in 1969, the identical 12 months it started operations within the foodservice enterprise with the Marzetti model acquisition.
The corporate manufactures and distributes a reasonably slender product assortment break up into two main classes: frozen and non-frozen. It makes salad dressings and numerous dips below the Marzetti model, frozen breads below the Sister Schubert’s and New York manufacturers, in addition to caviar, noodles, croutons, flatbreads and different bread merchandise below a wide range of smaller manufacturers.
The Marzetti and New York manufacturers are money cows for Lancaster, providing its core merchandise of dips and dressings in addition to croutons and frozen breads, respectively. Lancaster sells what quantities to equipment for meals and does it very nicely.
Supply: Investor presentation
Nevertheless, Lancaster additionally has partnerships with main shopper manufacturers like Olive Backyard, Jack Daniel’s, Buffalo Wild Wings and Weight Watchers (WW), licensing the respective logos to provide merchandise for grocery retailer cabinets. A portion of the proceeds of those merchandise goes to the license homeowners however these agreements are a method for Lancaster to diversify away from its personal core manufacturers.
Lancaster’s market cap is just below $5 billion, and the corporate is predicted to provide about $1.6 billion in income this fiscal 12 months. The overwhelming majority of Lancaster’s gross sales are made within the US, so foreign money threat is just not an element. It sells its merchandise via the Retail and Foodservice divisions, providing its frozen and non-frozen merchandise via these channels.
Lancaster has management positions in its core manufacturers together with New York, Sister Schubert’s, Flat Out (flat breads) and Marzetti, whereas it’s extra centered on development with its smaller manufacturers and acquisitions.
Lancaster reported fourth quarter and full–12 months earnings on August 26th, 2021, and outcomes had been blended towards expectations. Whole internet gross sales had been up 20% to a fourth quarter document of $386 million. Excluding Omni Baking gross sales, consolidated internet gross sales had been up 21%. Retail internet gross sales had been up 11% to $214 million, whereas Foodservice income soared 33% given energy of fast–service eating places and pizza chain gross sales.
Consolidated gross revenue was up 8.5% to a fourth quarter document of $97 million, pushed by sturdy gross sales development and ongoing price financial savings packages. These had been partially offset by commodity and freight prices, in addition to much less favorable gross sales combine. Gross revenue was additionally negatively impacted by incremental expenditures equivalent to shifting to co–manufacturing, in addition to elevated security measures at its crops.
Web earnings was up $1.3 million to $31.7 million, or $1.15 per share, each of which had been barely greater towards $30.4 million and $1.10 per share, respectively, a 12 months in the past.
Lancaster’s earnings development has been spotty as a result of it’s so beholden to risky restaurant gross sales. It has due to this fact made many acquisitions prior to now so as to not solely develop the portfolio, however try to make its income extra predictable.
Supply: Investor Presentation
We see 4% common earnings development yearly for the subsequent 5 years as we see almost all of that pushed by income will increase. We additionally word that Lancaster will virtually definitely not develop linearly, so some years will present declines whereas others present sizable will increase.
Over time, Lancaster has confirmed it may develop via a wide range of environments, together with a pandemic, and we don’t see that as altering anytime quickly.
Aggressive Benefits & Recession Efficiency
Lancaster’s aggressive benefits are primarily in its distributor partnerships with main sellers like Walmart (WMT) and McLane Distributors, in addition to its management positions in sure classes like croutons, frozen bread merchandise and dressings.
Lancaster has constructed a distinct segment in these classes through the years and whereas its heavy reliance upon two distributors for one-third of its income is a possible threat, it additionally means the corporate’s rivals don’t essentially have the identical entry to these massive prospects. Certainly, we see Lancaster’s publicity to Walmart as a internet optimistic throughout the pandemic as Walmart experiences surging grocery gross sales.
Lancaster is in a powerful place inside its core classes, however that doesn’t make it immune from recessions. Earnings-per-share throughout and after the Nice Recession are beneath:
- 2007 earnings-per-share of $1.45 (lower of 42% from 2006)
- 2008 earnings-per-share of $1.28 (lower of 12%)
- 2009 earnings-per-share of $3.17 (enhance of 147%)
- 2010 earnings-per-share of $4.07 (enhance of 28%)
Income fared fairly nicely throughout this era as Lancaster didn’t see any significant declines throughout the interval and actually, income was really greater in 2008 than 2007. Nevertheless, pricing and value of products suffered and because of this, margins declined considerably. This produced the earnings declines Lancaster skilled in 2007 and 2008 however to its credit score, the rebound was swift and robust in 2009 and 2010.
Nonetheless, Lancaster is much from recession-proof as a result of it sells merchandise to foodservice prospects – which undergo mightily throughout recessions and would thus order much less from Lancaster – and customers that will grow to be cash-strapped throughout recessions and eschew the meals equipment that the corporate gives. Lancaster, nonetheless, has carried out extraordinarily nicely to this point in 2020 regardless of very difficult circumstances. Earnings are anticipated to surge this 12 months, somewhat than decline, as can be anticipated throughout a typical recession.
Valuation & Anticipated Returns
We count on Lancaster to provide $6.30 in earnings-per-share this 12 months. Shares commerce at 27 occasions this 12 months’s EPS estimate, which is strictly in-line with our honest worth estimate. We due to this fact count on that adjustments within the valuation a number of won’t be a think about figuring out the inventory’s future returns.
As an alternative, we really feel future returns from Lancaster inventory will probably be derived from earnings-per-share development (estimated at 4% yearly) and the 1.8% dividend yield, resulting in complete anticipated returns of 5.8% per 12 months via 2026.
It is a first rate anticipated fee of return, which qualifies the inventory as a maintain, however not as a purchase presently. We advocate buyers watch for a significant pullback earlier than shopping for shares.
Lancaster is definitely not a high-yield earnings inventory, as a result of its low yield, but it surely does have a powerful observe document of dividend will increase. Sadly the present yield isn’t excessive sufficient to warrant a place merely for the dividend, and the modest EPS development we count on. We word that Lancaster isn’t as expensively valued because it has been at occasions within the latest previous, however is just not undervalued both.
With all of this in thoughts, we fee this Dividend King a maintain proper now.
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