Consumer goods stock Saputo Inc. has acquired Dairy Crest in the United Kingdom. This should contribute to its earnings over time. But Saputo remains a hold for now.
Saputo Inc. (TSX—SAP) is struggling. In the nine months to December 31, this Montreal-based dairy earned adjusted net income of nearly $498 million, or $1.27 a share. This was down by 12.4 per cent from adjusted net income of almost $569 million, or $1.45 a share, a year earlier.
We continue to rate Saputo a hold for now.
What Dairy Crest does and earns
On February 22, Saputo agreed to pay about C$1.7 billion to acquire Dairy Crest Group PLC of the United Kingdom. (The transaction closed on April 15.) Dairy Crest makes and sells cheese, butters, spreads and oils under leading British brands. This will let Saputo expand its international presence.
In the six months to September 30, 2018, Dairy Crest earned about $25 million on revenue of approximately $387 million. Saputo does not say how soon the acquisition will contribute to its earnings per share. If the British pound falls after Brexit, Dairy Crest’s revenue and earnings would turn into fewer Canadian dollars.
Saputo may keep on moving up the ranks
Saputo says that “it’s one of the top 10 dairy processors in the world, the largest cheese manufacturer and the leading fluid milk and cream processor in Canada, the top dairy processor in Australia and the second largest in Argentina. In the United States, Saputo ranks among the top three cheese producers and is one of the largest producers of extended shelf-life and cultured dairy products.”
With the acquisition of Dairy Crest, Saputo’s international operations will become that much bigger. We’ll watch to see if Saputo continues to move up the ranks of the world’s top dairy processors.
Rising dividends should lift share price
Saputo raises its dividend each year. It’s one of our ‘dividend aristocrats’. That’s because it has increased its dividend for more than five years in a row. That makes it more likely to deliver share price gains as well.
There’s another reason to expect Saputo to achieve further share price gains over the long run. That’s thanks to Saputo’s ongoing focus on hammering down its costs. This leaves more of the revenue to turn into profits.
This very conservative consumer goods stock remains a hold for now.
This is an edited version of an article that was originally published for subscribers in the March 15, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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