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NASDAQ:LANC
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Thursday, March 20, 2014 - 13:00
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Thursday, March 20, 2014 - 13:00

A Stock With 50 Straight Years Of Dividend Hikes

Thursday, March 20, 2014 - 1:00pm

One thing is for sure: People need to eat.

The best way to get a feel for the space is to look at the shelves and freezer section of your grocer. You'll likely find that many items in your shopping cart are owned by the same company.

I'm talking about one company in particular that makes everything from rolls and pasta to salad dressing and frozen noodles.

This year is shaping up to be a great one for Ohio-based Lancaster Colony Corp. (Nasdaq: LANC).

First, the company reported earnings per share (EPS) for its fiscal second quarter that beat Wall Street's estimates by $0.23. Second, the company sold its candle division, netting more than $25 million.

A Food Company With A Strong Balance Sheet
Lancaster Colony is now a pure play in the food industry, and will likely be making a transformative acquisition this year. The company's EPS for the second quarter came in at $1.44, up 12.5% from the prior year, and net sales increased 3%, coming in at a company-record $336 million.

The company's balance sheet remains ironclad with $176 million in cash (not including the sale of the candle division) and no debt. Cash flow for the past six months totaled $84 million, up nearly 24% from the same period the previous year.

The annual dividend remains $1.76 a share for a yield of 2%. The dividend payout is only 40% of earnings, and with no debt, the company can easily continue boosting its dividend payment.

Lancaster's share price has quickly outpaced the increase in dividend payments, but it's still worth noting that the company has boosted its dividend payment each year over the last 50 years. A further boost could bring Lancaster's dividend yield back to its pre-financial crisis days of 3% to 4%.

More Growth In Specialty Foods
During the second quarter, sales in the food segment saw sales increase 7%, to $292 million. Cold weather on the East Coast also helped sales of the company's frozen noodles and bread, as did the performance of several newer products.

Flickr/stanleylieber
Another major opportunity for the company is to expand its popular New York brand to the West Coast.

This year should see several new frozen bread and pasta items introduced, and the company will be increasing its whole grain offerings to target health-conscious consumers. Another major opportunity for the company is to expand its New York brand to the West Coast.

More Acquisitions Are Likely
The company should also start using its cash hoard to make acquisitions. Most notably, there has been a pickup in the better-for-you products space. There are still a number of brands out there that complement Lancaster's portfolio nicely. These include brands in the retail space, which inherently carry higher margins, and those with leading market positions.

Its new acquisition focus will likely be in the $50 million to $100 million range, which is a bit larger than the company's previous acquisitions. I'd look for the company to expand into other areas of the grocery store, which includes the produce section. Look for Lancaster to also show interest in expanding its presence in the frozen bread category.

Risks to Consider: The biggest risk is the competitive nature of the specialty foods business. Lancaster Colony is competing with the likes of General Mills (NYSE: GIS), ConAgra Foods (NYSE: CAG), Kraft Foods Group (Nasdaq: KRFT), and many other food companies. These companies not only compete with Lancaster Colony in grocery stores but also for potential acquisition targets.

Action to Take --> Buy Lancaster Colony with a price target of $110. This would be 24 times next year's earnings and in line with its historical average. It's also below some of the other major foods companies in the space, including Treehouse Foods (NYSE: THS) which trades at 32 times earnings and J&J Snack Foods (Nasdaq: JJSF)'s 27 times. Investors also get a 1.8% dividend yield with Lancaster.

P.S. In our latest research -- "The Top 10 Stocks for 2014" -- we've uncovered several more investments that are similar to LANC. They dominate their markets, pay increasing dividends, and have rock-solid balance sheets. To learn more about these ideas, including several names and ticker symbols, visit this link.

Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.