A big cheese in the dairy world

The COVID-19 pandemic has restrained the recent financial results of Saputo Inc. At the same time, Saputo plans to grow through acquisitions and organically.

Montreal-based Saputo Inc. earned a little more in the year to March 31, 2020 than it did the year before. In the first quarter of fiscal 2021, however, this dairy’s earnings per share slipped. Saputo remains a buy for long-term share price gains and decent dividends that grow every year. Saputo is a ‘dividend aristocrat’. It has raised its dividend each year since at least 2004 (as far back as we looked).

Saputo “produces, markets, and distributes a wide array of dairy products from Canada, the United States, Australia, Argentina and the United Kingdom”. It’s “one of the top 10 dairy processors in the world, a leading cheese manufacturer and fluid milk and cream processor in Canada, the top dairy processor in Australia, and the second-largest in Argentina. In the USA, Saputo ranks among the top three cheese producers and is one of the largest producers of extended shelf-life and cultured dairy products. In the United Kingdom, Saputo is the largest manufacturer of branded cheese and top manufacturer of dairy spreads”. This geographical diversification reduces Saputo’s exposure to the economy of any one country and the idiosyncrasies of the dairy markets in different countries.

Saputo’s earnings rose by only 1.9 per cent

In fiscal 2020, Saputo earned an adjusted $1.62 a share. This was up by only 1.9 per cent from $1.59 a share the year before. The increase was thanks to acquisitions. But the COVID-19 pandemic hurt its results, mostly in March. In the US, consumers bought more packaged and non-perishable goods. At the same time, sales to restaurants and food-service companies plunged. This is likely to hurt Saputo’s results this year as well.

In the first quarter of fiscal 2021, Saputo’s earnings slipped. In the three months to June 30, 2020, it earned an adjusted 39 cents a share. This was down by 7.1 per cent from earnings of 42 cents a share, a year earlier. Management noted results were picking up with the reopening of countries. A second wave of COVID-19 is an unknowable risk, of course.

Saputo writes: “The [first] quarter began amidst the COVID-19 pandemic and the resulting adverse global economic conditions, which disrupted financial markets (including pricing of commodities), supply chains and business productivity.”

Saputo will continue to make acquisitions

Saputo is not the only dairy to face challenges. In fact, we expect it to fare better than most. To the extent that competitors choose to leave, or are forced out of, dairy markets, Saputo could continue to make acquisitions to gain market share.

Indeed, Saputo “aims to continue to grow through targeted acquisitions. The company intends to seize future acquisition opportunities . . . with the objective of further strengthening its existing business”.

Interestingly, Saputo plans to diversify its product offering to include plant-based products. This may appeal to customers who like dairy products but worry about their long-term health effects.

This is an edited version of an article that was originally published for subscribers in the September 4, 2020, 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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