Blue Chip Stocks In Focus: Lancaster Colony

PUBLISHED Aug 22, 2022, 12:55:50 PM        SHARE

img
imgSure Dividend Blog

Published on August 17th, 2022, by Felix Martinez

There is no exact definition for blue chip stocks. We define it as a stock with at least ten consecutive years of dividend increases. We believe an established track record of annual dividend increases going back at least a decade shows a company’s ability to generate steady growth and raise its dividend, even in a recession.

As a result, we feel that blue chip stocks are among the safest dividend stocks investors can buy.

With all this in mind, we created a list of 350+ blue-chip stocks, which you can download by clicking below:

Click here to instantly download your free list of all blue chip stocks, along with important investing metrics.

In addition to the Excel spreadsheet above, we will individually review the top 50 blue chip stocks today as ranked using expected total returns from the Sure Analysis Research Database.

This article will analyze Lancaster Colony Corporation (LANC) as part of the 2022 Blue Chip Stocks In Focus series.

Business Overview

LANC began its operations in 1961 after combining several small glasses and related houseware manufacturing companies. The new company 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 reasonably narrow product assortment split into two major categories: frozen and non-frozen. It makes salad dressings and various dips under the Marzetti brand, frozen bread under the Sister Schubert’s and New York brands, caviar, noodles, croutons, flatbreads, and other bread products under a variety of smaller brands.

LANC Company Highlights

Source: Investor Presentation

Lancaster reported third-quarter earnings on May 5th, 2022, with results coming in mixed. GAAP earnings-per-share missed estimates by $0.98, coming in at -$0.17. Revenue was better than expected at $404 million, up 13% year-over-year, beating estimates by $12.7 million.

Net sales rose to a third-quarter record as the retail segment saw 7.4% growth to $213 million, which was attributable to pricing actions to combat inflation. Volume in the segment declined by 2%, reflecting planned product line reductions and a very tough comparable period a year ago.

The Foodservice segment saw sales soar 20% to $190 million as inflationary pricing and increased demand pushed the top line higher. Volume was down 2% as demand was unfavorably influenced by challenges in the restaurant industry of higher costs, tight labor market conditions, and a cautious consumer.

Gross profit was down $22 million to $68 million, driven by the unfavorable impacts of significantly higher commodity and packaging costs, higher freight and warehousing costs, increased labor costs, etc. The company noted its pricing actions helped offset some of this.

The company continues to experience unprecedented inflation for raw materials and packaging that accelerated during the period and reflects an increase of nearly 30% versus the prior-year quarter. Freight costs also increased approximately 30% compared to last year, pacing well ahead of its previous expectations.

The net impact of its pricing actions lagged these extraordinary levels of cost inflation. The company financial results were also adversely impacted by higher labor costs and supply chain disruptions attributed to COVID-19-related labor shortages, volatility in customer demand, and some severe weather events.

Growth Prospects

Lancaster’s earnings growth has been spotty because it is beholden to volatile restaurant sales. It has therefore made many acquisitions in the past to not only grow the portfolio but attempt to make its revenue more predictable.

We see 6% 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.

For example, since 2010, the company saw four different years of negative earnings growth. In 2011, earnings fell 11%, while in 2014, earnings fell 8%. Also, in 2018, earnings decreased slightly compared to the prior year of 1%.

Over time, Lancaster has proven it can grow through various environments, including a pandemic, and we don’t see that as changing anytime soon.

LANC cash to shareholders

Source: Investor Presentation

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 experienced 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; in fact, revenue was higher in 2008 than in 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 decisive in 2009 and 2010.

Still, Lancaster is far from recession-proof because it sells products to food service customers – who 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.

As you see below, the company balance sheet is very strong. The company does not have debts on its balance sheet.

LANC Strong Balance Sheet

Source: Investor Presentation

Valuation & Expected Returns

We expect Lancaster to produce $4.45 in earnings-per-share this year. Shares trade at 32 times this year’s EPS estimate, above our fair value estimate. We, therefore, expect that changes in the valuation multiple will be a negative 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 6% annually, and the 2.1% dividend yield, leading to total expected returns of 5.1% per year through 2027.

This is a low expected rate of return, which qualifies the stock as a hold at this time. We recommend investors wait for a meaningful pullback before buying shares.

Final Thoughts

Lancaster is undoubtedly 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 is overvalued, as it has been at times in the recent past. Thus, we rate this stock as a hold at the current price.

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.

Originally Posted on suredividend.com


Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
Amazon Stock Price Prediction – Should I Buy Amazon Stock Now?
Image

Amazon business stood firm during Covid-19 and even when the stock market is engulfed in pessimism. Amazon Stock Price Prediction is too good to ignore.

The Top 3 Dividend Aristocrats Now
Image

When it comes to finding ways to compound wealth over time, we believe the best way is to buy high-quality dividend stocks, reinvest dividends, and hold them for the long-term.

Will Meta Stock Go Up? Panic, or not to Panic, That is the Question
Image

Will Meta stock go up? Many investors have become skeptical about the future of Meta Platforms due to the continuous loss of share price and advertisement revenue.

Due For A Pull Back
Image

Stock Market Commentary

Cisco Systems: Time To Buy
Image

The bear market is making retail and professional investors nervous, but the market will not be down forever.

Medical Properties Trust (MPW): Undervalued and 7%+ Yield
Image

Medical Properties Trust, Inc. (MPW) is one undervalued company I bought recently because it has been down over 40% since its high in the ~$24 price range.

Comcast (CMCSA): Undervalued and 2.5% Yield
Image

The markets have recovered a little over the past three weeks. But the market is still down for the year. Thus, the market has brought down many stocks with it. Over the past three weeks, the market has been up a little over 7.5% from this year’s lows.

Will Appian Stock Go Up?
Image

Most Appian investors are getting edgy and wondering, will Appian stock go up? The stock drop has caused anxiety among investors in recent months. However, the trend may change acoording to analysts forecasts.

Apple Earnings Per Share – Why is Apple Dividend So Low?
Image

If you are wondering why is apple dividend so low and what is the expected apple earning per share in the next quarter, read this informative article.

Anticipation
Image

Stock Market Analysis & Commentary

GOOG Earnings Hit Slightly By the Current Economic Slowdown
Image

Goog Earnings have been affected by the current economic activity, yet the revenues are still higher.

Tesla stock prediction as Sell-off of Bitcoin
Image

What will be the price of TSLA stock in the coming months and years? Will it recover its position after this recent dip?

Nvidia Stock Price & Forecast | NASDAQ: NVDA
Image

NVIDIA Corporation (NASDAQ: NVDA), the company invented GPU in 1999 which help the growth of the PC gaming market.

Political Agreements Boost Green Stocks and Semiconductors
Image

Sen. Joe Manchin (D-WV) Has Decided to be Team Player

The Case for Buying the Dip
Image

The case for buying the dip is based on the availability of undervalued assets in a market that has suffered indiscriminate selling.

Berkshire Hathaway Forecast ahead of Quarter 2 2022 Earnings Report
Image

Berkshire Hathaway announced its Quarter 1 2022 earnings on 30th April. During the first quarter, earnings declined due to slowing economic growth and stock market pullback. Berkshire Hathaway quarter 2 2022 earnings are expected to be published on 5th August. Let's look at the current market trends and Berkshire Hathaway's performance to determine a possible outcome of the quarter 2 2022 earnings.

What Happened to Netflix Stock? Stranger Things About the Netflix Stock Drop in 2022
Image

What Happened to Netflix Stock? A Horrible Series or just a scary episode of the Netflix Stock Drop in 2022? Let's explore everything!

Mrmd, bros
Image

Headed for substantial growth

Bank of America Stock Price Today - BAC Making Huge Revenues in a Bear Market
Image

Are you hunting the high-value stocks to make high returns even when the pessimism prevails? Bank of America Stock Price Today is just at the lowest level.

Why it’s Time to Start Buying TESLA Long
Image

Is it possible to sell Tesla, the most shorted stock globally, as a potential long buy? On 21 July 2022, Tesla’s stock surged by 10%, attributed to its strong earnings in its Q2 2022 results. The surge was an unpleasant surprise for short traders, who made an estimated mark-to-market loss of over $1 billion.

Resources for Publishers
Resources for New Investors
Boosted with BossCoin
Financial Literacy Leaders
user_profile
Tom Hamilton
user_profile
Wise Intelligent
user_profile
Mark Robertson
user_profile
Kevin Matthews II
user_profile
Akeiva Ellis
user_profile
Brendan Dale
user_profile
Kenneth Chavis IV
user_profile
Sharita Humphrey