Rogers Sugar: Finding Sweet Dividends

May.23.12 | About: Rogers Sugar (RSGUF)

Sugar is an interesting commodity since it is used as food and fuel. You can make anything taste better by adding some sugar to it, but it has little food value. It can be made into ethanol and burned like gas but it has trouble competing with gas refined from crude oil. As an exercise in fundamental investing I want to look at the history of sugar in my managed portfolios. As a fundamental first - technical second investor, my research and thoughts lead me to study the sugar market. A casual review of my managed portfolios will find oil, food, gold, medical and many of the big names you read about everyday, like Coke (NYSE:KO). In the middle of the list of stocks is a small company named Rogers Sugar (or Lantic). You can find them trading under the symbol OTC:RSGUF. and the Rogers page is here with all the details.

During the "good ole days" I was shopping for sugar related investments while the ethanol push under the Bush administration was in the news around 2005. Below is the 10 year graph for Rogers; you'll see the price action was up and down enough to offer some compelling entry points for a patient investor. The Brazilians were already taking sugar cane off the market and adding it to the market for ethanol so I thought the fundamentals were in line for an investment. Rogers Sugar is what I found. The next two charts are courtesy of tmx.quotemedia.com.

Now we all remember the Canadian Trust tax law ambush that finished up in 2011 (law was passed years before in the Halloween Massacre of 2006). Rogers Sugar was among the group of trust companies that handled it fairly well. The yield in 2005/6 was around the 10-12% range. Did it hold? Yes it did. Right through 2008 and 2009 and into the corporate re-formation. You can see the listed yield below in current terms:

The yield is not 12% anymore because of some tax implications and the price increase. On 10/04/2005 I purchased, for a client, 1189 shares oat an average of about $3.50 per share. I added to that position an additional 650 shares at $3.20 on 01/03/2007. I elected to reinvest the dividends when received since the start.

What does this mean? It means that after many dividend increases and re-investments this sugar is yielding 16.42% on an investment of $6211.00. The total return is above 150%. Performance was impacted to the downside by the 15% foreign security income tax as well. Not bad for these years, at least for my humble trading.

Fundamentally sugar is not as strong as it was in 2005. I only say that because the fundamentals of a long term higher range in sugar price is tough to bet on. But look at the charts below (courtesy of http://www.investortrip.com):

Above we see that long term sugar consumption has reflected growing population trends. I like this graph because it goes back to 1960. Shown next is the mid-term effect of growing demand on stock piles.

(Chart courtesy of www.bigpictureagriculture.com)

This shows (above) a shrinking world stock pile of sugar. I understand that there are other kinds of sugar and sweet things in the market but this is still very relevant and telling. And finally we see the effect on price in the chart below. (Courtesy of www.tradingcharts.com)

I never welcome volatility but please notice the amplitude of the candlesticks in the early years and the later years. This indicates an uncertainty on the supply side that is typical of a market near its capacity to deliver.

Rogers has proven to be well managed and these guys know how to run a sugar business. The increase in company debt level has yet to develop into real growth, but farming is a tough business and I choose to trust (but verify) on the debt issue. I believe the recent increase in the dividend is sustainable and this is a safe 6.5% yield as long as the trend in sugar price remains sideways or up. So it is safe and risky? Yes, aren't they all?

Fundamentally sugar could be vulnerable to some downside swings but the long term demand growth is in place. I strongly recommend starting with a review of the Brazilian sugar market and the growth of production in Brazil's 37 year old ethanol market. Changes in that market could change the world sugar market very quickly. Understand your risk tolerance and do your due diligence. Dig into the fundamentals and think about things.

Disclosure: I am long OTC:RSGUF (also trade as RSI.TO on the Toronto exchange).