Up to date on October 1st, 2021 by Bob Ciura
Lancaster Colony (LANC) has a dividend monitor document that few corporations can rival. The corporate has elevated its money dividend for 58 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 not less than 50 consecutive years.
You possibly can see the total listing of all 32 Dividend Kings right here.
Now we have created a full listing of all Dividend Kings, together with necessary monetary metrics resembling price-to-earnings ratios and dividend yields. You possibly can 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 under:
Dividend Kings are the “better of the very best” in relation to rewarding shareholders with money and better dividend payouts every year. 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 corporations mixed. The brand new firm virtually instantly started rewarding its shareholders with quarterly money dividends and finally went public in 1969, the identical yr it started operations within the foodservice enterprise with the Marzetti model acquisition.
The corporate 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 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 effectively.
Supply: Investor presentation
Nonetheless, 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 supply merchandise for grocery retailer cabinets. A portion of the proceeds of those merchandise goes to the license homeowners however these agreements are a approach 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 supply about $1.6 billion in income this fiscal yr. The overwhelming majority of Lancaster’s gross sales are made within the US, so forex threat isn’t an element. It sells its merchandise by means of the Retail and Foodservice divisions, providing its frozen and non-frozen merchandise by means of 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.
Lancaster reported fourth quarter and full–yr earnings on August 26th, 2021, and outcomes had been blended towards expectations. Complete web gross sales had been up 20% to a fourth quarter document of $386 million. Excluding Omni Baking gross sales, consolidated web gross sales had been up 21%. Retail web 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 robust gross sales progress and
ongoing value financial savings applications. 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 resembling shifting to co–manufacturing, in addition to elevated security measures at its vegetation.
Web earnings was up $1.3 million to $31.7 million, or $1.15 per share, each of which had been barely increased towards $30.4 million and $1.10 per share, respectively, a yr in the past.
Lancaster’s earnings progress has been spotty as a result of it’s so beholden to unstable restaurant gross sales. It has subsequently made many acquisitions up to now so as to not solely develop the portfolio, however try and make its income extra predictable.
Supply: Investor Presentation
We see 4% common earnings progress yearly for the following 5 years as we see practically all of that pushed by income will increase. We additionally notice 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 well develop by means of 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 over time 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 throughout the pandemic as Walmart experiences surging grocery gross sales.
Lancaster is in a robust place inside its core classes, however that doesn’t make it immune from recessions. Earnings-per-share throughout and after the Nice Recession are under:
- 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 effectively throughout this era as Lancaster didn’t see any significant declines throughout the interval and actually, income was truly increased in 2008 than 2007. Nonetheless, pricing and price of products suffered and in consequence, 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 way from recession-proof as a result of it sells merchandise to foodservice clients – which undergo mightily throughout recessions and would thus order much less from Lancaster – and shoppers that will turn into cash-strapped throughout recessions and eschew the meals equipment that the corporate presents. Lancaster, nevertheless, has carried out extraordinarily effectively so far in 2020 regardless of very difficult circumstances. Earnings are anticipated to surge this yr, quite than decline, as could be anticipated throughout a typical recession.
Valuation & Anticipated Returns
We anticipate Lancaster to supply $6.30 in earnings-per-share this yr. Shares commerce at 27 instances this yr’s EPS estimate, which is precisely in-line with our honest worth estimate. We subsequently anticipate that adjustments within the valuation a number of is not going to be a think about figuring out the inventory’s future returns.
As a substitute, we really feel future returns from Lancaster inventory might be derived from earnings-per-share progress (estimated at 4% yearly) and the 1.8% dividend yield, resulting in whole anticipated returns of 5.8% per yr by means of 2026.
This can be a respectable anticipated charge of return, which qualifies the inventory as a maintain, however not as a purchase at the moment. We advocate buyers anticipate a significant pullback earlier than shopping for shares.
Lancaster is definitely not a high-yield earnings inventory, on account of its low yield, nevertheless it does have a powerful monitor 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 progress we anticipate. We notice that Lancaster isn’t as expensively valued because it has been at instances within the latest previous, however isn’t undervalued both.
With all of this in thoughts, we charge this Dividend King a maintain proper now.
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