Consumer staple companies make great dividend stocks because people buy things like food and beverages regardless of the economy. Food conglomerate Lancaster Colony (LANC -0.43%) may not have the name recognition of a company like Coca-Cola. Still, it's been growing its payout for the same 59 years that Coca-Cola has!
What's more, Lancaster Colony has handily delivered better investment returns than Coca-Cola over the past decade, so it's time to get to know this little-known Dividend King. Here's why investors should consider Lancaster Colony for their long-term portfolio.
Image source: Getty Images.
About Lancaster Colony
Lancaster Colony produces and sells various food products, including frozen bread, refrigerated dips, dressings, sauces, and croutons. Some popular brands include New York Bakery, Flatout, and Marzetti. The company also produces sauces under licensing deals with brands like Buffalo Wild Wings, Olive Garden, and Chick-Fil-A.
The company specializes in niche food product categories, maintaining strong brand positioning with less competition from generic brands. Frozen bread, for example, commands freezer space in a grocery store, which is premium real estate. It's usually easier to develop additional shelf space in an aisle than to install more freezers in a store.
Approximately 64% of Lancaster Colony's sales are products requiring climate control, and its licensed products in the shelf-stable side of the business carry significant brand power of their own. Most people probably want the actual Olive Garden salad dressing instead of a generic one.
Superb fundamentals drive dividend growth
The differentiated products that Lancaster Colony sells help protect its "turf" within sales channels, but the company certainly isn't a hyper-growth company. Its revenue has risen an average of 3% annually over the past decade.
However, management runs a very tight ship financially, which has helped the company maximize its resources. Lancaster Colony holds no debt, giving it flexibility with every dollar of profit it generates.
This includes acquisitions of new brands to drive growth; Lancaster Colony has acquired many of its top brands over the years, including:
- New York Bakery in 1978
- Reames in 1989
- Chatham Village in 1997
- Sister Schubert's in 2000
- Warren Frozen Foods in 2003
- Flatout in 2015
- Bantam Bagels in 2018
- Omni Baking Company in 2021
It seems clear from the long time frame and years between deals that management isn't ever in a hurry, waiting instead for the right deal to come together. Management that doesn't put the balance sheet in danger to boost short-term growth numbers is an underrated trait in a company.
After investing in its factories and equipment, the dividend is the company's most prominent use of cash and the primary vehicle for delivering profits back to investors. In addition to raising the payout for 59 years, Lancaster Colony also issues a special dividend on occasion, the last one coming in 2015.
The regular dividend yields 2%, so investors probably have better options if they're looking for more income. Still, all those annual raises and the occasional special payout add up over a multi-year holding period.
Is Lancaster Colony a buy today?
It might be fair to call Lancaster Colony a "boring" company, but that isn't bad. It's poised to continue doing what it's been doing for decades. The balance sheet is still debt-free, and management has $114 million in cash to use as it pleases, so more acquisitions will likely occur at some point.
Furthermore, growth has picked up in recent years; revenue has grown more than 6% annually over the past three years, so investors will want to see how that continues moving forward.
The stock's one major problem is its valuation, which currently stands at a price-to-earnings (P/E) ratio of 34, a hefty amount for a company that grows at the pace that Lancaster Colony does.
Data source: LANC PE Ratio.
The market's current sentiment toward growth stocks may push investors toward more defensive companies like Lancaster Colony. Still, it's hard to call the stock a "table-pounding" buy when the valuation probably needs to continue cooling off for a while longer.
Still, Lancaster Colony is a simple yet effective business with a multi-decade track record of success. If investors get the opportunity to buy shares at a more reasonable valuation, it could prove to be a long-term winner in any dividend portfolio. For now, the stock may be best as a name on your watchlist.
