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What can be said about Lancaster Colony (LANC) that hasn't been said already? Apparently a lot, the Company only had two articles written about it in 2013 and one in 2012 making it somewhat under-followed. The reasons to at least consider Lancaster for your portfolio are numerous with the Company near the top of the US Dividend Champions list with 51 straight years of dividend increases, today's pricing providing a modest 2.1% and a reasonable EV multiple just over 12x.

I. COMPANY OVERVIEW

Lancaster Colony is a diversified manufacturer and marketer of consumer products. The Company focuses primarily on specialty foods for the retail and food service markets. It also manufactures and markets candles for the food, drug and mass markets. It operates in two segments: Specialty Foods and Glassware and Candles. The Company's Specialty Foods segment manufactures and sells salad dressings and sauces marketed under various brands, such as Marzetti, T. Marzetti, Cardini's, Pfeiffer, Simply Dressed, Katherine's Kitchen and Girard's. The Company sells candles, candle accessories, and other home fragrance products in a variety of sizes, forms and fragrances in retail markets to mass merchants, supermarkets, drug stores and specialty shops under the Candle-lite brand name.

II. HISTORICAL PERFORMANCE

 20092010201120122013
Revenue$1,051.5$1,056.6$1,089.9$1,131.4$1,165.9
% Growthn/a0.5%3.2%3.8%3.1%
Gross Profit215.5270.3242.4240.1267.1
% Margin20.5%25.6%22.2%21.2%22.9%
EBITDA153.1197.0165.9163.6182.0
% Margin14.6%18.6%15.2%14.5%15.6%
Net Income89.1115.0106.495.8109.2
Avg Diluted Shares28.028.227.727.327.3
% Growthn/a0.5%-1.7%-1.5%0.1%

Note: All figures are MM's (except per share data) unless noted otherwise

Lancaster Colony has performed well over the past five years. The Company's revenue expanded every year since 2009 at a compounded annual growth rate of 2.6%. The gross margin has trended positively although being relatively volatile for a company with this level of margins varying over a 5.1% range over the past five years (bottoming at 20.5% and peaking at 25.6%). Similarly, EBTIDA Margins have expanded from 14.6% in 2009 to 15.6% in 2013 resulting in EBITDA expansion from $153MM in 2009 to $182MM in 2013 (19% expansion) over the five year period.

Per Share Data
 20092010201120122013
Revenue$37.49$37.50$39.36$41.49$42.73
% Growthn/a0.0%5.0%5.4%3.0%
Gross Profit7.689.608.768.819.79
EBITDA5.466.995.996.006.67
Net Income3.184.083.843.514.00
Dividends1.141.191.291.411.52
Payout Ratio35.7%29.0%33.6%40.1%38.0%
Dividend Growthn/a4.4%8.9%9.3%7.8%

Note: Per share data based on weighted average diluted shares outstanding.

On a per share basis, there isn't much additional to identify. The Company had relatively flat weighted average shares outstanding, only slightly decreasing from 28MM to 27MM over the period (a 2.7% decrease). EBITDA per share has expanded from $5.46 to $6.67 (a 22% increase as compared to a 19% increase at the Company level). The Company's dividends per share have been growing, increasing from $1.14 per share in 2009 to $1.52 per share in 2013 (a 34% increase or a 7.6% compounded annual growth rate) while maintaining a stable payout ratio in the 35% range.

III. CAPITALIZATION

 Market / Par ValueEBITDA Multiple
- Cash and Equivalents$1330.7x
+ Market Capitalization$2,33013.0x
Total Enterprise Value$2,19612.2x

Note 1: Based on TTM EBITDA of $179MM as of 9/30/13.

Note 2: Market Cap based on 27.3MM shares outstanding and a $85.38 market price as of 1/17/14.

Lancaster Colony has a completely unleveraged capital structure with nearly a turn of EBITDA as cash (0.7x TTM EBITDA) and a total enterprise value of 12.2x TTM EBITDA. Ideally, the Company would incur a little bit of low cost debt to leverage their equity returns. Even with moderate leverage the Company would have a low cost of debt and maintain significant financial flexibility while enhancing returns to the equity holders.

IV. PROJECTIONS

 20142015201620172018
EBITDA$185.6$195.8$205.6$215.9$226.7
% Growth2.0%5.5%5.0%5.0%5.0%
Interest Expense0.00.00.00.00.0
Taxes53.356.359.162.165.2
Capital Expenditures21.622.723.925.126.3
Dividends48.048.048.048.048.0
Addl' FCF$62.6$68.8$74.6$80.7$87.2

Note: All figures are MM's (except per share data) unless noted otherwise. Consensus Estimates only relate to EBITDA projections. All other assumptions are based on unadjusted LTM actuals.

The consensus estimates for Lancaster are conservative projecting a growth rate between 5.5% and 2.0% annually through 2015 at the EBITDA line (afterwhich I've assumed a 5% EBITDA growth). Under the consensus case the Company is projected to have significant additional free cash flow available to reinvest in the business, repurchase shares (always assumed for modeling purposes), or increase the dividend.

 20142015201620172018
Addl' FCF$62.6$68.8$74.6$80.7$87.2
Share Redemption Price$98.24$112.98$129.93$149.42$171.83
Shares Redeemed0.60.60.60.50.5
Wtd Avg Diluted Shares26.626.025.524.924.4
Dividends Per Share$1.80$1.84$1.89$1.93$1.97
Dividend Growth18.6%2.3%2.3%2.2%2.1%

The share redemptions are assumed to be at a 15% annually compounded price. I believe that this is structured very conservatively. If the weighted average redemption price exceeded this threshold, the investor would have ample opportunity and time to re-evaluate their position and consider selling their position for a gain from today's price. The Company's share redemption would allow for a 2% increase in the dividend annually from the share redemptions alone. Additionally, the Company's payout ratio would decline as the dollar amount of dividends paid would not be increasing while the Company's earnings (using EBITDA as a proxy) would be increasing.

If the Company performs in line with the consensus estimates and pay dividends / redeems shares as outlined above, the Company would achieve the IRR / Cash on Cash returns illustrated below based on the outlined terminal EBITDA multiples.

Returns Based on Terminal EBITDA Multiple
 9.8x10.3x10.8x11.3x11.8x12.3x
IRR4.2%5.3%6.3%7.4%8.3%9.7%
Cash on Cash1.20x1.25x1.30x1.36x1.41x1.49x

V. RECOMMENDATION

Lancaster has a lot going for it. First, the Company has a great 51 year history of increasing the dividend annually. Second, the current yield today is good (although not great) at 2.1% given where the Company has been trading recently. Finally, the Company trades at a reasonable valuation just over 12x EBITDA (as compared to P&G at ~13x EBITDA, see P&G Dividend Stock Analysis). All that said, I think the Company is a little richly valued here. To entice me to bite, I'd need more yield and more growth to not pick a "best of breed" within the consumer good segment such as Procter & Gamble (PG), Clorox (CLX), Colgate-Palmolive (CL), etc. For current holders of the stock, is your outlook rosier than mine?

Source: Lancaster Colony: Underfollowed And Undervalued?