LANC - Lancaster Colony: Projected Earnings Trends Point To Lower Prices For Fiscal 2024

2023-09-13 10:34:44 ET

Summary

• Lancaster Colony Corporation has raised its annual dividend payout for 59 consecutive years.
• The stock is currently in a downtrend, but lower prices may benefit long-term income investors if proceeds are invested aggressively.
• Lancaster's dividend yield is higher than its 5-year average, and its dividend growth rates surpass the sector average.

Intro

Lancaster Colony Corporation ( LANC ) is a US-based food -based company that has raised its annual dividend payout every year for the past 59 years. Dividend growth investors have done very well in Lancaster Colony over many decades now as we see on the 20-year chart below. Apart from the company's consistent dividend increases over almost six decades, shares have understandably undergone strong appreciation in the process.

In one way, this stands to reason as companies that are able to consistently grow their dividend over a long time frame must have matching if not superior earnings growth to fund the increases. To this point, if we go to Lancaster's long-term chart, we see that the stock is currently in a cyclical long-term downtrend as a negative histogram reading has coincided with a bearish monthly MACD crossover. Now, MACD crossovers are usually a dependable signal on long-term charts due to the amount of information (which goes into the signal) that gets digested plus due to the dual role of the indicator (momentum & trend)

In fact, if we look at the past four MACD monthly sell signals, we see that shares fell pretty significantly to the downside in the aftermath of each signal before bottoming once more. Suffice it to say, lower prices over the next 12+ months most likely are on the cards in Lancaster, but this may not be a cause of concern for the long-term multi-decade income-orientated investor. Let me explain.

Core long-term dividend growth or income investors prefer lower prices in their underlyings over time. The reason is that when one can pick up shares at lower prices, compounding can occur within the portfolio at a much faster clip when dividends are reinvested aggressively. Therefore, the most important aspect (from a long-term perspective) is that Lancaster remains a fundamentally sound outfit where ongoing higher lows and higher highs will remain the order of the day. To gain insights into this question, we can go to Lancaster's key financial metrics and trends that make up the company's dividend. If strength is witnessed with respect to current metrics when compared to 5-year averages, for example, this should point to an inevitable bottom in the stock's latest multi-month down-move.

Dividend Yield

Lancaster's present dividend yield comes in at 2.13% based on a forward annual payout of $3.40 per share. Although lower than the sector (2.75%) in general, the company's yield comes in higher than the corresponding 5-year average (1.79%). Many dividend growth investors use the dividend yield as a barometer of whether the respective stock is cheap or not. The higher the yield (compared to historic averages), the cheaper the stock. Off to a good start here.

Dividend Growth

Robust dividend growth rates are an essential part of the dividend growth strategy, especially in times of inflation, in order to protect one's purchasing power. Furthermore, consistent growth in the payout enables investors to earn a percentage of the company's profits, which obviously fosters confidence over time which results in loyal shareholders. As we see below, Lancaster's dividend growth rates continue to surpass the sector on average, although average annual dividend growth rates have been slowing ever so slightly in recent years.

Dividend Pay-Out Ratio

To see whether the gradual decline in the growth of Lancaster's dividend is a result of reduced affordability, we go to the dividend payout ratio. When we take Lancaster's fiscal 2023 dividend payments ($92.4 million) and divide this number into the company's annual GAAP earnings ($111.3 million), we get a trailing dividend payout ratio of 83.01%. It must be acknowledged that this ratio is on the high side and comes in well above Lancaster's 5-year average of 62.7%.

Earnings Per Share Growth Predictions

Analysts who cover Lancaster expect the consumer defensive stock to report $6.10 in earnings per share in this present fiscal year and $6.83 in fiscal 2025. Although these targets demonstrate expected bottom-line growth of 28% & 11% respectively (which would easily cover strong single-digit annual dividend growth in LANC), the estimates have been falling, as we see below.

If inflation remains high however and demand pulls back somewhat over the near term, the principal advantage that the company has is that it runs a zero-debt balance sheet which currently holds $88.5 million of cash & ST investments. Furthermore, through lower expected capex spending in fiscal 2024 ( as a result of the lion's share of spending having already been done at the Horse Cave expansion), we maintain cash flow will remain buoyant at Lancaster going forward. Strong cash flow generation will enable the firm to keep on investing aggressively in the firm whether this be new products, an improved supply chain model, or its new ERP program ' Project Ascent ' which is expected to bring meaningful efficiencies to Lancaster's business model over time.

Conclusion

To sum up, although Lancaster Colony from a technical standpoint is expected to drift downward in fiscal 2024, the company's dividend remains in a sound place despite the above-average pay-out ratio and slowing growth. If shares can successfully test long-term support depicted below, we are looking at a 12% to 14% down move here over time. Long-term dividend investors need not fret here just yet. We look forward to continued coverage.

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