Ohio-based Lancaster Colony (LANC, Financial) is a manufacturer and marketer of specialty food products for the retail and foodservice channels, primarily in the U.S. (95% of all products). The company name is probably most known among dividend-focused investors as being one of the only 16 U.S. stocks that have increased dividends consecutively for more than 55 years.
Other than that, the business supplies to 16 of the top 25 national restaurant chains and possesses market-leading positions in six retail food categories. Marzetti, New York Bakery and Sister Schubert’s are popular names that have 85%, 40% and 55% of the total markets of produce dip, frozen garlic bread and frozen rolls, respectively.
As of fiscal 2019, the retail segment accounted for 51% of the revenue, mostly through the company-owned brands and licensed brands (e.g., Olive Garden, Buffalo Wild Wings and Chick-fil-A). The remaining 49% came from foodservice accounts, including chain restaurants, universities and healthcare facilities, mainly under private labels.
According to the latest filing, 30% of the company is owned or controlled by John Gerlach, Executive Chairman and the founders’ descendant. The current CEO and Chief Operating Officer (COO), David Alan Ciesinksi, holds less than 0.1% of the total shares outstanding.
We think that Lancaster Colony mainly relies on its strong retail brands to fend off competitions in a sustainable way. A sharp focus on high-margin, high-return offerings also helps to maintain the established economic moat. As you can see below, the business consistently generated a superior return on invested capital that has outperformed its peers, including General Mills (GIS, Financial), J&J Snack Foods (JJSF, Financial) and Hormel Foods (HRL, Financial).
Lancaster Colony has its long history of sustained organic sales growth, which supports its consecutive dividend increases. The main underlying drivers include geographic and channel expansion, product line extension and a tailwind of healthy eating habits. The company’s vision is being “the better food company."
To fuel the increase in shareholder value, the company also aims to expand the operating margin by enhancing the efficiency of the supply chain. Of course, such an initiative cannot sustain long-term growth.
Additionally, the management looks for M&A opportunities. Recent examples include Flatout in 2015, Angelic Bakehouse in 2016 and Omni Baking in 2018, all of which seem successful so far. However, shareholders may want to keep close eyes on the company’s margins and asset efficiency moving forward.
The recession risk appears limited for Lancaster Colony, thanks to the defensive nature of the products. Per the chart below, the company’s top-line was moderately impacted during the Great Recession and managed to hold up well throughout the early 2000s recession.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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