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Lancaster Colony Corporation (NASDAQ:LANC) is a consumer product company that has two distinct product lines, specialty foods and glassware and candles. Lancaster Colony trades on the NASDAQ Exchange under the ticker "LANC." Being a relatively small company, LANC is not part of any major indices. LANC is a U.S. corporation and therefore pays its quarterly dividend in US dollar. Foreign investors will thus be likely subjected to withholding tax.

Dividend Calendar

LANC pays a quarterly dividend. The dividends are generally declared in February, May, August, and November, and are generally paid in March, June, September, and December. LANC generally increases its quarterly dividend once a year, in November. The last increase in November 2013 was of 10%. Still, some years LANC can increase its quarterly dividend twice (e.g. in 2013).

Dividend History

LANC has increased its quarterly dividend for 51 consecutive years, making it a dividend champion (25 years or more of consecutive dividend increases). The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

Despite the state of the economy, LANC has been able to increase its dividend year in year out over the last ten years. Still, the rate at which the annual dividend grows seems to follow the economy, high when the economy is booming, low when the economy slows down.

That is to be expected though, since besides selling specialty foods, LANC sells glassware and candles, products which are not very recession-proof. Still, despite the ups and downs, LANC's average dividend growth rate was around 6%, a rate one might expect in the future.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purposes.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

Then, the evolution of the free cash flow, dividends, and payout ratios.

What is striking from the two graphs is that despite two tougher years (2007-2008 for the earnings, 2006-2007 for the free cash flow), LANC has been able to largely maintain its dividend payout ratio under 40%, both with respect to the earnings and with respect to the free cash flow. In my view, this is the sign of prudent and safe management. Keeping a low payout ratio allows the company to go through tough years without having to cut the dividend. Notably, in the last ten years, LANC went through such tough years and was still able to increase its dividend. The graphs are thus clear indication that LANC's management is prudent and manages LANC's money safely. In any event, a payout ratio under 40% is safe.

Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

As mentioned above, LANC has increased its quarterly dividend for over 50 years. There are not many companies with such dividend track records. 50 years of consecutive dividend increases is an exploit in itself. That being said, can the dividend continue to grow?

I think so. First, Lancaster has shown its willingness to increase its dividend, even during tough years. Second, the earnings and free cash flow are generally growing. Third, with a payout ratio under 40%, LANC has room to further increase its dividend. So, I don't see why LANC would not continue to increase its dividend.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For LANC, I've used the following inputs:

  • Share price: $84.50
  • Dividend rate: $1.76
  • Dividend growth rate:
    • Optimistic scenario: 6.0%
    • Realistic scenario: 4.8%
    • Pessimistic scenario: 3.6%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR. According to the above values, the range of estimated fair values for LANC varies from $35.52 (pessimistic) to $44.58 (optimistic), with a realistic value of $39.73. With a current share price around $84.50, LANC appears significantly overvalued. I've also calculated that the DGR would need to be 12.23% over the next 20 years to justify the current price of $84.50. A DGR of 12.23% is twice as large as the average DGR of LANC over the last ten years.

Unless Lancaster starts to increase its dividend at a much faster pace, which I doubt -- LANC is simply way too expensive -- at least with respect to its dividend growth prospect.

At $84.50, I think LANC is significantly overvalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years. Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For LANC, I've used the following inputs:

  • Initial investment: $1000
  • Current yield: 2.08%
  • Dividend growth rate:
    • Optimistic scenario: 6.0%
    • Realistic scenario: 4.8%
    • Pessimistic scenario: 3.6%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

The graph speaks for itself. At the current price and yield, none of the DGR scenarios would return more money than a comparable investment in the benchmark stock. There is not much to add.

At the current price and yield, I think LANC would make a very poor dividend investment with respect to the estimated cash return.


I have mixed feelings about Lancaster. On the one hand, LANC is a dividend champion that has increased its dividend for over 50 years. It also has a low and generally stable payout ratio. So the company's dividend is not only safe, it is most likely to continue to grow.

On the other hand, LANC is simply way overvalued at the current price. And with such a high price, you get a relatively low yield (~2%) given the low dividend growth rate one might expect in the near future (~6%). If you already own LANC and you bought it when the price was much lower, holding it might make sense.

However, if you don't already own Lancaster shares, don't buy it at the current price, you would be paying way too much for a small dividend stream. What do you think?

Final recommendation: Don't buy.

Disclosure: I don't currently own shares of LANC.