Updated on October 1st, 2021 by Bob Ciura
Lancaster Colony (LANC) has a dividend track record that few companies can rival. The company has increased its cash dividend for 58 consecutive years, making it one of just 13 companies in the U.S. with that long of a streak. This puts the company among the elite Dividend Kings, a small group of stocks that have increased their payouts for at least 50 consecutive years.
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Dividend Kings are the “best of the best” when it comes to rewarding shareholders with cash and higher dividend payouts each year. This article will discuss Lancaster’s dividend and valuation outlook.
LANC began its operations back in 1961 after several small glass and related houseware manufacturing companies combined. The new company almost immediately began rewarding its shareholders with quarterly cash dividends and eventually went public in 1969, the same year it began operations in the foodservice business with the Marzetti brand acquisition.
The company manufactures and distributes a fairly narrow product assortment split into two major categories: frozen and non-frozen. It makes salad dressings and various dips under the Marzetti brand, frozen breads under the Sister Schubert’s and New York brands, as well as caviar, noodles, croutons, flatbreads and other bread products under a variety of smaller brands.
The Marzetti and New York brands are cash cows for Lancaster, offering its core products of dips and dressings as well as croutons and frozen breads, respectively. Lancaster sells what amounts to accessories for meals and does it very well.
Source: Investor presentation
However, Lancaster also has partnerships with major consumer brands like Olive Garden, Jack Daniel’s, Buffalo Wild Wings and Weight Watchers (WW), licensing the respective trademarks to produce products for grocery store shelves. A portion of the proceeds of these products goes to the license owners but these agreements are a way for Lancaster to diversify away from its own core brands.
Lancaster’s market cap is just under $5 billion, and the company is expected to produce about $1.6 billion in revenue this fiscal year. The vast majority of Lancaster’s sales are made in the US, so currency risk is not a factor. It sells its products through the Retail and Foodservice divisions, offering its frozen and non-frozen products through those channels.
Lancaster has leadership positions in its core brands including New York, Sister Schubert’s, Flat Out (flat breads) and Marzetti, while it is more focused on growth with its smaller brands and acquisitions.
Lancaster reported fourth quarter and full–year earnings on August 26th, 2021, and results were mixed against expectations. Total net sales were up 20% to a fourth quarter record of $386 million. Excluding Omni Baking sales, consolidated net sales were up 21%. Retail net sales were up 11% to $214 million, while Foodservice revenue soared 33% given strength of quick–service restaurants and pizza chain sales.
Consolidated gross profit was up 8.5% to a fourth quarter record of $97 million, driven by strong sales growth and ongoing cost savings programs. These were partially offset by commodity and freight costs, as well as less favorable sales mix. Gross profit was also negatively impacted by incremental expenditures such as shifting to co–manufacturing, as well as increased safety measures at its plants.
Net income was up $1.3 million to $31.7 million, or $1.15 per share, both of which were slightly higher against $30.4 million and $1.10 per share, respectively, a year ago.
Lancaster’s earnings growth has been spotty because it is so beholden to volatile restaurant sales. It has therefore made many acquisitions in the past in order to not only grow the portfolio, but attempt to make its revenue more predictable.
Source: Investor Presentation
We see 4% average earnings growth annually for the next five years as we see nearly all of that driven by revenue increases. We also note that Lancaster will almost certainly not grow linearly, so some years will show declines while others show sizable increases.
Over time, Lancaster has proven it can grow through a variety of environments, including a pandemic, and we don’t see that as changing anytime soon.
Competitive Advantages & Recession Performance
Lancaster’s competitive advantages are mainly in its distributor partnerships with major sellers like Walmart (WMT) and McLane Distributors, as well as its leadership positions in certain categories like croutons, frozen bread products and dressings.
Lancaster has built a niche in these categories over the years and while its heavy reliance upon two distributors for one-third of its revenue is a potential risk, it also means the company’s competitors don’t necessarily have the same access to those large customers. Indeed, we see Lancaster’s exposure to Walmart as a net positive during the pandemic as Walmart experiences surging grocery sales.
Lancaster is in a strong position within its core categories, but that doesn’t make it immune from recessions. Earnings-per-share during and after the Great Recession are below:
- 2007 earnings-per-share of $1.45 (decrease of 42% from 2006)
- 2008 earnings-per-share of $1.28 (decrease of 12%)
- 2009 earnings-per-share of $3.17 (increase of 147%)
- 2010 earnings-per-share of $4.07 (increase of 28%)
Revenue fared pretty well during this period as Lancaster didn’t see any meaningful declines during the period and in fact, revenue was actually higher in 2008 than 2007. However, pricing and cost of goods suffered and as a result, margins declined significantly. This produced the earnings declines Lancaster experienced in 2007 and 2008 but to its credit, the rebound was swift and strong in 2009 and 2010.
Still, Lancaster is far from recession-proof because it sells products to foodservice customers – which suffer mightily during recessions and would thus order less from Lancaster – and consumers that may become cash-strapped during recessions and eschew the food accessories that the company offers. Lancaster, however, has performed extremely well thus far in 2020 despite very challenging conditions. Earnings are expected to surge this year, rather than decline, as would be expected during a typical recession.
Valuation & Expected Returns
We expect Lancaster to produce $6.30 in earnings-per-share this year. Shares trade at 27 times this year’s EPS estimate, which is exactly in-line with our fair value estimate. We therefore expect that changes in the valuation multiple will not be a factor in determining the stock’s future returns.
Instead, we feel future returns from Lancaster stock will be derived from earnings-per-share growth (estimated at 4% annually) and the 1.8% dividend yield, leading to total expected returns of 5.8% per year through 2026.
This is a decent expected rate of return, which qualifies the stock as a hold, but not as a buy at this time. We recommend investors wait for a meaningful pullback before buying shares.
Lancaster is certainly not a high-yield income stock, due to its low yield, but it does have an impressive track record of dividend increases. Unfortunately the current yield isn’t high enough to warrant a position simply for the dividend, and the modest EPS growth we expect. We note that Lancaster isn’t as expensively valued as it has been at times in the recent past, but is not undervalued either.
With all of this in mind, we rate this Dividend King a hold right now.