Dividend Kings In Focus: Lancaster Colony

Up to date on September eighth, 2023 by Aristofanis Papadatos

Lancaster Colony (LANC) has a dividend monitor file that few firms can rival. The corporate has elevated its money dividend for 60 consecutive years, making it considered one of 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 possibly can see the total record of all 50 Dividend Kings right here.

Now we have created a full record of all Dividend Kings, together with essential monetary metrics reminiscent of price-to-earnings ratios and dividend yields. You possibly can obtain your copy of the Dividend Kings sheet (together with monetary metrics reminiscent of price-to-earnings ratios and dividend yields) by clicking on the hyperlink under:

Dividend Kings are the “better of the most effective” with regards 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 firms mixed. The brand new firm nearly instantly started rewarding its shareholders with quarterly money dividends and finally went public in 1969, the identical 12 months it started operations within the meals service enterprise with the acquisition of the Marzetti model.

Lancaster manufactures and distributes a reasonably slender product assortment cut up into two main classes: frozen and non-frozen. It makes salad dressings and varied 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 properly.

Supply: Investor presentation

Nonetheless, 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 supply 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 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 shouldn’t be an element. The corporate sells its merchandise by way of the retail and meals service divisions, providing its frozen and non-frozen merchandise by way 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 targeted 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 under expectations on each the highest and backside line. Whole internet gross sales remained grew 0.5%, from $452 million within the prior 12 months’s quarter to a fourth-quarter file of $455 million. Retail internet 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 file of $98.4 million to $93.2 million, as a consequence of start-up prices at dressing and sauce facility in Horse Cave, Kentucky. Adjusted earnings per share declined 28%, from $1.39 to $1.00, as a consequence of 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 unstable restaurant gross sales. Subsequently, the corporate has made many acquisitions up to now to be able 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 subsequent 5 years, with practically all of this progress pushed by income progress. We additionally notice that Lancaster will nearly actually not develop linearly, as expertise has proven that some years are prone to present declines whereas others are prone to present sizable will increase.

Over time, Lancaster has confirmed it may possibly develop by way 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 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 internet constructive as Walmart enjoys rising 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 properly throughout this era as Lancaster didn’t see any significant declines through the interval and in reality, income was really greater in 2008 than 2007. Nonetheless, 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 powerful in 2009 and 2010.

Additionally it is essential to notice that Lancaster has a rock-solid, nearly debt-free steadiness sheet. Consequently, the corporate can simply endure tough financial intervals 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 develop into cash-strapped throughout recessions and eschew the meals equipment that the corporate gives.

Lancaster, nonetheless, proved markedly resilient all through the coronavirus disaster, with only a 9% lower in earnings per share in 2020 and file earnings per share anticipated in fiscal 2024.

Valuation & Anticipated Returns

We anticipate Lancaster to realize file 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 at present buying and selling at 26.6 occasions this 12 months’s EPS estimate, which is decrease than our honest worth estimate of 29 occasions EPS. If the inventory trades at our assumed honest valuation stage in 5 years, it would take pleasure in 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 subsequent 5 years. Consequently, the inventory receives a purchase score.

Closing Ideas

Lancaster is actually not a high-yield revenue inventory, as a consequence of its low yield, nevertheless it does have a formidable monitor file of dividend progress. Sadly, the present yield shouldn’t be excessive sufficient to warrant a place merely for the dividend. Alternatively, the promising EPS progress expectations and the affordable 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: