Getting high on Peller’s shares and dividends

Canadian consumer goods stock Andrew Peller is a dividend aristocrat having raised its dividend for five years in a row. We expect both its shares and its dividends to keep growing.

Canadian_Consumer_Goods_StockGrimsby, Ontario-based Andrew Peller Ltd. (TSX—ADW.A) earned record profits in the year to March 31. It expects to earn record profits again in fiscal 2018. The company has raised its dividend for five years in a row. This makes it a ‘dividend aristocrat’. Peller remains a buy for further long-term share price gains and modest but growing dividends.

Peller calls itself “a leading producer and marketer of quality wines in Canada. With wineries in British Columbia, Ontario, and Nova Scotia, the Company markets wines produced from grapes grown in Ontario’s Niagara Peninsula, British Columbia’s Okanagan and Similkameen Valleys, and from vineyards around the world.”

It sells “award-winning premium and ultra-premium brands . . . [and] popularly-priced varietal brands. . . . The Company also produces wine-based liqueurs and cocktails . . . and will be continuing to launch new offerings from the Wayne Gretzky Estate Winery and Craft Distillery in the coming year. . . . the Company produces and markets premium personal wine-making products. . . . Global Vintners distributes products through over 170 Winexpert authorized retailers and more than 600 independent retailers across Canada, the United States, the United Kingdom, New Zealand, Australia and China. . . .  The Company owns and operates 101 well-positioned independent retail locations in Ontario. . . .” Much of Peller’s icewine is exported. This diversification across product offering and geographies reduces Peller’s risk.

In fiscal 2017, Peller earned $23.6 million, or 57 cents a share, excluding one-time items in both years. This was up from $20.3 million, or 48.5 cents a share, the year before.

In fiscal 2017, Peller generated cash flow of $33.2 million. This 10.4 per cent increase in cash flow from the year before confirms its higher earnings. Even better, the company’s cash flow exceeded its needs: net investment of $20.5 million; and dividend payments of $6.6 million.

Chief executive officer John Peller said: “We were very pleased to announce a 10.3% increase in our common share dividends, our fifth increase in the last five years, and a reflection of our record results and confidence in the future.” The dividend of 18 cents yields a modest 1.64 per cent. This mostly reflects Peller’s big share price gains in recent years. But at least dividends are going up.

Peller originally paid only $4.8 million for land, $40.5 million for vineyard lands and $43.5 million for buildings. The land and buildings in Ontario’s ‘Golden Horseshoe’ has certainly soared in value. That’s because the dramatic rise in real estate values in Toronto over the last 20 years has spread across southern Ontario. The difference between the original price less depreciation and the current market value of Peller’s vineyard lands and buildings is not reflected in its books. This creates what’s known as a ‘hidden value’. The true book value of these assets is well above the official $4.16 per share.

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Peller is optimistic about its outlook. President Randy Powell said, “looking ahead, we expect another year of growth in fiscal 2018 as we capitalize on our strong reputation for quality and innovation”. In addition, more consumers‚ particularly young consumers, are drinking less beer but more wine. Older consumers continue to prefer wine as they age. The company plans to continue introducing new wine brands.

Peller’s strategy is to grow in “its core business as a producer and marketer of . . . wines and wine-related products through concentrating on and developing leading brands. . . . The Company has also recently entered the spirits category” under its Wayne Gretzky label.

Peller “expects to maximize the efficiency of its existing assets while also making additional investments in capital expenditures to increase capacity”. The company will also evaluate potential acquisitions.

We expect Peller to earn 66 cents a share this year. Based on this estimate, the shares trade at a reasonable price-to-earnings ratio of 16.6 times.

Keep in mind, too, that Peller is the largest publicly-traded Canadian wine producer. Having few other peers gives the company what you might call a ‘scarcity’ premium.

Peller remains a buy for further long-term share price gains and modest but growing dividends.

This is an edited version of an article that was originally published for subscribers in the June 23, 2017, 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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