Lassonde – Not a dividend darling anymore

LAS.A - Lassonde Industries Inc.
Lassonde Industries is a leader in the production and sale of food and beverages in North America. The company is one of the top two producers of store brand, shelf-stable fruit juices, and drinks in the U.S. Almost 40% of Lassonde’s sales are in Canada and 60% is from the U.S.

Founded in 1918, Lassonde is a leading name in the agri-food industry and operates through 15 plants across Canada and the U.S. The company deals in specialty food products, fruit and vegetable juices, and wines. It is also a major producer of cranberry sauces. The company operates through specialized subsidiaries such as Apple & Eve, Arista Wines, Lassonde Pappas and Company, Old Orchard Brands, and Lassonde Specialties and more than 25 well-known brands in Canada and the U.S. Some of its prominent brands are Oasis, Rougemont, Del Monte, Everfresh, Graves, and Fruite, etc. Its Old Orchards shelf-stable brand commands first or second positions in many key Midwest and South Central U.S. markets.

Investment Data

Revenue Growth & Market Exposure

Lassonde engages in the manufacture and sale of fruit and vegetable juices and beverages. Retail sales (sales to food retailers and wholesalers) account for approximately 86% of total annual sales while food service sales (sales to restaurants, hotels, hospitals, schools, etc) constitute the remaining 14%. Lassonde’s client base is diverse comprising of supermarket chains, independent grocers, superstores, warehouse clubs, major pharmacy chains, hotels, hospitals, schools, and wholesalers.

Lassonde is focusing on product innovation and private label customer development. The company is expanding its product portfolio to cater to consumers’ shift towards healthy and nutritious food. Lassonde is increasing its capacity and is investing in two major projects with additional capacity for fruit juice and drinks and specialty food products. The company continues to invest in new technology to allow for greater flexibility and more container options.

Lassonde completed the acquisition of Old Orchard Brands (OOB) last year, which has expanded its portfolio of ready-to-drink fruit juices and drinks in the Central U.S. The company suffered from significant cost increases in the last year. However, during the most recent quarter, Lassonde reported improving sales on the back of stabilization in transportation costs and PET resin prices. The company is expecting to benefit from selling price increases in the U.S. market and a major private label sales contract going online in the second quarter.

Lassonde’s sales have compounded annually at nearly 9% over the last five years. A consumer focused product offering, long standing relationship with key stakeholders, diverse customer base and leading brand reputation make Lassonde a distinct winner.

Dividends

Lassonde Industries has been paying increasing dividends over the years till its most recent quarter when it cut its dividend payment by a massive 26%. The company suffered from intense competition and low margins as a result of cost inflation and disturbance in its U.S. market.

However, Lassonde’s dividend streak has been pretty impressive prior to that. Its 2018 dividends paid represented 25% of the prior year’s profit and a 32% annual increase. The company has grown its dividend at 23% CAGR per annum, over the last three years. Its earnings have also compounded at more than 24% annually, during the same time. Lassonde has a dividend yield of 1.2% and a very reasonable payout ratio of 25% currently. It has also re-established its share repurchase program.

Lassonde has predicted that sales will be lower and capital expenses will be higher this year, which implies that the dividend growth this year will also not be as high as in the past. However, the two new projects are expected to increase capacity and position the company well for continued growth in the future. Lassonde is targeting organic growth through innovation around national brands and by developing new solutions for customers through private brands.

Lassonde has a whole list of priorities for 2019, eyeing organic growth, expanding its presence in new markets and segments, increasing capacities, etc which should improve its overall profitability. The company’s strategy of innovating in its current market segments and entering adjacent segments ensure long term growth and should support future dividend.

Competition

Lassonde Industries operates in the processed food category. The food industry in the U.S. market is highly competitive. Lassonde Industries faces intense competition not only from traditional retailers but also from growing online and discounted retail trade. Tropicana, OceanSpray (PepsiCo) and Minute Maid (Coke) are its top competitors.

Lassonde also competes directly with Cott Corp., a leading supplier of carbonated soft drinks with distribution in North America, Europe, and the UK. However, the company’s ongoing product and packaging differentiation provide it a competitive edge over its peers.

Bottom Line

Over the last 100 years of existence, Lassonde Industries has successfully managed to fuel its geographic expansion and enter the untapped market segments. Its acquisition of OOB has also improved its manufacturing footprint in the U.S. against a backdrop of rising transportation costs. The company is in a good position to tap the growing demand for drinks and beverages driven by its cost optimization, automation potential, better brand positioning, and expanding production capacities.

LAS.A was doing well but had a sudden drop for more than 6 months and then the last nail in the coffin was the dividend cut. If you invested at the peak, what do you do? What’s your rule around a dividend cut? If you are recently looking into Lassonde, do you you like the story?

Personally, I am moving along. I don’t need drama and the P/E is a little on the high side for a consumer defensive stock even though the sector is also sailing on the high side. There are other opportunities.

LAS.A vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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