This is the thirteenth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 17%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. I would normally not review LANC since it misses 3 of my guidelines but is part of this series of dividend kings. This article is about Lancaster Colony Corporation (NASDAQ:LANC) and why it's a total return investment that has increased its dividend for 53 years making it a dividend King and has in the last 42.7 months had a very large above average total return but has a below average dividend at 1.54%. Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and food service markets. Lancaster Colony Corporation is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Lancaster Colony Corporation will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Lancaster Colony Corporation passes 8 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review" These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Lancaster Colony Corporation is a mid-cap company with a capitalization of $3.5 billion. The size of Lancaster Colony Corporation cash flow at $122.8 Million from its food products business, allows it to pay its below average dividend and maintain its business growth. I most times like to invest in the largest company in a sector because it got there by being better than the others. In this sector the large companies would be Kellogg (NYSE:K) with a capitalization of $30 Billion and Campbell Soup (NYSE:CMP) with a capitalization of $20.5 Billion. This makes Lancaster Colony Corporation much to small compared to the large companies to compete with but could always to a takeover target.
Lancaster Colony Corporation has a dividend yield of 1.54% which is below average for the market. The dividend has been increased for 53 years and its dividend is safe. The payout ratio average over the last 5 years is 42% which leaves plenty of cash to pay its dividend and maintain the company's business slow growth. Lancaster Colony Corporation is therefore not a good choice for the dividend income growth investor, since the dividend is below average. There are many companies reviewed in this study that have a much better current dividend and better company growth potential. The companies special food products are having a growth spurt with recent earnings doing well.
Lancaster Colony Corporation yearly cash flow is good at $144.8 Million and leaves plenty of cash after paying its low dividend for maintaining and growing its business. This good cash flow also allows the company to have cash available to grow the business slowly and easily pay its dividend.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Lancaster Colony Corporation has a 5 year past CAGR of 3.4% (from S&P Capital IQ) below my requirement. Looking back five years $10,000 invested five years ago would now be worth $25,026 today (from S&P Capital IQ). This makes Lancaster Colony Corporation a good choice for the total return investor. For Lancaster Colony Corporation S&P Capital IQ has a three star rating or hold with a 5 year average PE of 21, fair for this sector. In the long term Lancaster Colony Corporation below average dividend and its growing business in the food sector is a good choice for the total return investor with its well above average total return.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Lancaster Colony Corporation had much better total return than the Dow baseline in my 42.7 month test period. I chose the 42.7 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance to see how the company does in good and bad markets. This strongly above average total return of 100.57% for Lancaster Colony Corporation compared to the DOW baseline of 41.73% makes Lancaster Colony Corporation a excellent investment for the total return investor. Lancaster Colony Corporation has done better than the economy over the test period and has a dividend growth rate of 6.41% over the past 10 years. Year to date total return is 11.05% well ahead of the DOW gain so far this year. The dividend is below average at 1.54% and has been increased for 53 years making the company a dividend King. I added a guideline for total return mainly when I am looking at a high yield company as a test to see if the yield and price change really does beat the market. For Lancaster Colony Corporation it shows that it is a good steady company having a large beat over the DOW by 59% for my test period.
DOW's 42.7 month total return baseline is 41.73%
42.7 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Lancaster Colony Corporation
Last Quarter's Earnings
For the last quarter Lancaster Colony Corporation reported earnings on April 28, 2016 that beat expected earnings at $1.06 compared to last year at $0.77 and expected at $0.82. Revenue was a beat by $9.31 Million and total revenue increased by 9.3% year over year to $287.8 Million. This was a great report showing the increased revenue and beating the earnings goal. This leaves plenty of cash remaining after paying the $0.50 dividend for business expansion. Earnings for the next quarter will be released about August 18 and is expected to be at $1.04/share compared to last year at $0.93/share, showing continued strong growth going forward.
Company Business Overview
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and food service markets. The Company is focused on its specialty foods segment. It manufactures and sells a range of food products, including salad dressings and sauces; fruit glazes, vegetable dips and fruit dips; Greek yogurt vegetable dips and hummus; frozen garlic breads; frozen Parker house style yeast dinner rolls and sweet rolls, as well as biscuits; dry egg noodles; croutons and related products; snack sticks and flat bread wraps and pizza crusts. The business has no debt and has $94.4 Million cash available. This is a good up and coming company with a good growing business its size gets me worried as being in retirement, If I was younger LANC would be a buy.
Takeaways and Recent Portfolio Changes
Lancaster Colony Corporation is not a good choice for the dividend growth income investor increasing its dividend for 53 years but with a well below average dividend rate of 1.54%. Lancaster Colony Corporation strongly beat the total return compared to the Dow average and is a excellent choice for the total return growth investor. The business is growing at 3.4% CAGR and Lancaster Colony Corporation is in the food supply sector which does all right even in this slow 2% economy. If you don't already have a position in the food supply sector Lancaster Colony Corporation may be worth a position for your total return sector who wants to beat the averages going forward. Lancaster Colony Corporation is one company I am pleased with as a solid long term company but not a buy for The Good Business Portfolio because of its low CAGR and small cap size, but still has a great total return over my test period. I'm in retirement and think there are safer investments for me, and this is a personal choice.
Sold some CAB covered calls, sold August $55's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I will move the calls up and out if this is true at close to expiration date.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the four top positions in The Good Business Portfolio. Johnson and Johnson (NYSE:JNJ) is 8.7% of the portfolio, Altria Group Inc. (NYSE:MO) is 8.0% of the portfolio, Home Depot (NYSE:HD) is 8.0% of portfolio, Boeing (NYSE:BA) is 7.8% of the Portfolio, therefore MO, JNJ and HD are now in trim position with Boeing getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash flow on the 787 program in the third quarter of possibly $100 Million.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on AA, CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, JNJ, MO, HOG, OHI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.