Up to date on September eighth, 2023 by Aristofanis Papadatos
Lancaster Colony (LANC) has a dividend observe report that few corporations can rival. The corporate has elevated its money dividend for 60 consecutive years, making it one among simply 13 corporations 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 may see the complete checklist of all 50 Dividend Kings right here.
We have now created a full checklist of all Dividend Kings, together with vital monetary metrics resembling price-to-earnings ratios and dividend yields. You may obtain your copy of the Dividend Kings sheet (together with monetary metrics resembling price-to-earnings ratios and dividend yields) by clicking on the hyperlink beneath:
Dividend Kings are the “better of the most effective” in relation to rewarding shareholders with money and better dividend payouts annually. This text will talk about Lancaster’s dividend and valuation outlook.
Enterprise Overview
Lancaster Colony started its operations in 1961 after a number of small glass and associated houseware manufacturing corporations mixed. The brand new firm nearly instantly started rewarding its shareholders with quarterly money dividends and ultimately went public in 1969, the identical yr it started operations within the meals service enterprise with the acquisition of the Marzetti model.
Lancaster manufactures and distributes a reasonably slim product assortment cut up into two main classes: frozen and non-frozen. It makes salad dressings and numerous dips beneath the Marzetti model, frozen breads beneath the Sister Schubert’s and New York manufacturers, in addition to caviar, noodles, croutons, flatbreads and different bread merchandise beneath quite a lot 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 effectively.
Supply: Investor presentation
Nevertheless, Lancaster additionally has partnerships with main client manufacturers like Olive Backyard, Jack Daniel’s, Buffalo Wild Wings, and Weight Watchers (WW), licensing the respective emblems to provide merchandise for grocery retailer cabinets. A portion of the proceeds of those merchandise goes to the license house owners however these agreements are a approach for Lancaster to diversify away from its personal core manufacturers.
Lancaster’s market cap is simply $4.5 billion, and the corporate has generated $1.8 billion in income within the final 12 months. The overwhelming majority of Lancaster’s gross sales are made within the U.S., so forex threat just isn’t an element. The corporate sells its merchandise via the retail and meals service 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 progress with its smaller manufacturers and acquisitions.
Progress Prospects
Lancaster reported fourth-quarter and full-year earnings on August twenty third, 2023, with outcomes beneath expectations on each the highest and backside line. Whole web gross sales remained grew 0.5%, from $452 million within the prior yr’s quarter to a fourth-quarter report of $455 million. Retail web gross sales edged up 1.3% to $236 million however meals service income declined 0.4% to $218 million.
Consolidated gross revenue dipped 5%, from a fourth-quarter report of $98.4 million to $93.2 million, resulting from start-up prices at dressing and sauce facility in Horse Cave, Kentucky. Adjusted earnings per share declined 28%, from $1.39 to $1.00, resulting from decrease demand from some giant clients and the aforementioned start-up prices.
Lancaster’s earnings progress has been spotty as a result of it’s so beholden to risky restaurant gross sales. Subsequently, the corporate has made many acquisitions previously with the intention to, not solely develop the portfolio, but additionally try to make its income extra predictable.
Supply: Investor Presentation
We anticipate 8% common annual earnings progress over the following 5 years, with practically all of this progress pushed by income progress. We additionally observe that Lancaster will nearly definitely not develop linearly, as expertise has proven that some years are more likely to present declines whereas others are more likely to present sizable will increase.
Over time, Lancaster has confirmed it might probably develop via quite a lot 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 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 opponents don’t essentially have the identical entry to these giant clients. Certainly, we see Lancaster’s publicity to Walmart as a web constructive as Walmart enjoys rising 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 (improve of 147%)
2010 earnings-per-share of $4.07 (improve of 28%)
Income fared fairly effectively throughout this era as Lancaster didn’t see any significant declines through the interval and in reality, income was truly greater in 2008 than 2007. Nevertheless, pricing and price of products suffered and therefore 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.
Additionally it is vital to notice that Lancaster has a rock-solid, nearly debt-free steadiness sheet. Consequently, the corporate can simply endure tough financial durations and wait patiently for a restoration.
Nonetheless, Lancaster is much from recession-proof as a result of it sells merchandise to foodservice clients – which endure mightily throughout recessions and would thus order much less from Lancaster – and customers which will turn out to be cash-strapped throughout recessions and eschew the meals equipment that the corporate gives.
Lancaster, nevertheless, proved markedly resilient all through the coronavirus disaster, with only a 9% lower in earnings per share in 2020 and report earnings per share anticipated in fiscal 2024.
Valuation & Anticipated Returns
We anticipate Lancaster to realize report earnings-per-share of $6.10 in fiscal 2024 because of an anticipated restoration of gross sales and sharp easing of value inflation. Shares are presently buying and selling at 26.6 occasions this yr’s EPS estimate, which is decrease than our truthful worth estimate of 29 occasions EPS. If the inventory trades at our assumed truthful valuation stage in 5 years, it is going to get pleasure from a 1.7% annualized acquire in its returns.
Given additionally 8% earnings-per-share progress and a 2.1% dividend yield, the inventory may provide a complete annual return of 11.5% over the following 5 years. Consequently, the inventory receives a purchase ranking.
Remaining Ideas
Lancaster is definitely not a high-yield revenue inventory, resulting from its low yield, however it does have a formidable observe report of dividend progress. Sadly, the present yield just isn’t excessive sufficient to warrant a place merely for the dividend. Then again, the promising EPS progress expectations and the cheap valuation of this Dividend King render it engaging round its present worth.
Moreover, the next Positive Dividend databases comprise probably the most dependable dividend growers in our funding universe:
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