A Specialty Dividend For Dividend Growth Investors
I am well aware of the trends within the consumer food group so I am not surprised by what I see in Lancaster Colony (NASDAQ:LANC) fiscal Q1 report. What I am surprised about is that I have never heard of this company and I wished I had. There are quite a few attractive consumer staples companies out there right now and this is one of them.
Before I go on I want to establish exactly what it is we’re talking about. Lancaster Colony Corporation operates in two segments with a focus on consumer products. The core segment is frozen bread products, salad dressings, and dips. Among the brands that I recognize are Marzetti’s, Cardini, and Girard but there are many others. Notably, Lancaster Colony Corporation has licensing agreements for consumer and B2B products with Olive Garden, Chic-fil-a, and Buffalo Wild Wings.
A Mixed Quarter For Lancaster Colony Corporation Is Nothing To Worry About
Lancaster Colony Corporation reported a mixed quarter but it is really nothing to worry about. The top-line revenue grew by 3.6% and outpaced consensus by 3.6% while earnings fell short. Adjusted EPS of $1.45 missed by $0.15 while GAAP EPS of $1.35 missed by $0.10 but there are some mitigating factors to consider. The first is that revenue growth, when adjusted for legacy contracts associated with a prior acquisition, is a much stronger 5.2%. The second is that costs associated with growth initiatives were more than expected for the quarter and helps offsets the difference.
On a segment basis, the Retail segment did all the lifting. Stay-at-home demand drove higher sales in all categories with an emphasis on garlic bread, dinner rolls, and Olive Garden salad dressing (guilty, we buy both kinds, lite and regular). Other areas of strength include new products sold under license from Chic-fil-a and Buffalo Wild Wings. The F&B segment saw its revenue fall -9.0% but again, when adjusted, is closer to -6.4%.
The company’s gross profit rose 0.7% over the past year to $92.71. The increase is due to the higher retail sales mix and new product lines offset by higher costs. Higher costs include wages, COVID-related health, and safety equipment as well as higher freight and commodity costs. Moving down to the net profit line, net profits fell on a YOY basis due to the aforementioned cost of growth-focused initiatives. Looking forward, these costs are short-term expected to pay for themselves and more.
"Looking ahead to our fiscal second quarter, historically our biggest sales quarter of the year, we expect continued growth in consolidated net sales with Retail outpacing Foodservice. We anticipate manufacturing costs will remain higher due to the unfavorable impacts of COVID-19 and increasingly inflationary costs for both commodities and freight. Our ongoing cost savings programs and net price realization will help to offset these higher costs.”
Lancaster Colony Corporation, All Cash And No Debt
The Lancaster Colony Corporation trading at a relatively high multiple for its earnings and yield but there is something else to consider. The company is sitting on nearly $7.00 per share in cash, has no debt, and a history of dividend increases. The company has been increasing the yield for 57 years and on track to raise it again later this month or early December. Based on the balance sheet, earnings, free cash flow, and 10% CAGR the next increase should be at least 10% if not more. What I find especially interesting is that this company has paid out sizeable special dividends in the past. With such a hoard of cash, there is certainly a possibility they will do so again. Regardless, the $2.80/1.60 yield is safe and sound.
A Buying Opportunity In Lancaster Colony Corporation
If you want to know what a buying opportunity looks like take a look at the chart of Lancaster Colony Corporation. The stock price fell hard at the open because of ??? I’m not sure, maybe it was just the short-interest, and buyers were waiting to scoop up the deal. Price action opened near a key support level, one that dates back to before the pandemic, and has only moved upward since. The candle is long and white, confirms support, and is showing signs of confirmation in the indicators as well. Price action may not move straight up from here but I think it will move higher over the long-term.
