Got milk? Need cheese? Get paid!

          Saputo Inc. earned more in the first quarter of fiscal 2015. It has raised its dividend for 15 years in a row. The company is also paying a stock dividend. As it integrates its acquisitions, it should pay you higher dividends and give you long-term price gains.

Saputo Inc., one of our Key stocks, earned more in the three months to June 30. This producer, marketer and distributor of dairy products has raised its dividend for 15 years in a row. The dividend of $1.04 a share is up by over 13 per cent from 92 cents a share. It’s also up greatly from the six cents a share the company paid in 2000 (adjusted for a couple of two-for-one stock splits). Given the rise in its share price, the company plans to double the number of its outstanding shares. This will make them more affordable to individual investors. Saputo remains a buy for long-term share price gains and rising dividends.

In the first quarter of fiscal 2015, Saputo earned $145 million, or 73 cents a share, excluding one-time items. This was up by 5.8 per cent from earnings of $137 million, or 69 cents a share, a year earlier.

Saputo’s revenue rose less than its costs

In the first quarter, Saputo’s revenue jumped by 20.6 per cent, to $2.621 billion. This reflected five factors. First, Australian acquisition Warrnambool Cheese & Butter Factory contributed for a full quarter. Second, Atlantic Canadian acquisition Scotsburn Co-Operative Services has contributed since April 14. Third, the average block market per pound of cheese rose by 38 U.S. cents, while the average butter market price per pound went up by 51 U.S. cents. Fourth, higher selling prices—due to higher milk costs—and higher sales volumes in Canada and the U.S. Fifth, exchange rates added $34 million.

All of Saputo’s regular costs as a group climbed by 21.7 per cent, to $2.410 billion. The acquisitions added to depreciation and amortization costs. Interest costs climbed due to more debt. With revenue growth falling short of cost growth, the company’s pre-tax income was up by only 9.7 per cent. A higher tax rate left net earnings up by only 6.3 per cent.

On the positive side, Saputo’s cash flow advanced by 12.2 per cent, to $276 million. Even better, this greatly exceeded total investment of $93 million and accrued dividends of $44.9 million. The higher cash flow assisted in keeping the company’s net debt-to-cash-flow ratio at a safe 1.9 times.

We often note that the U.S. is a highly competitive market. As a result, Canadian companies often earn thinner profit margins south of the border. The U.S. accounted for 49.3 per cent of Saputo’s first-quarter revenue, but only 43.6 per cent of its underlying earnings. Negative market factors cut this segment’s underlying earnings by $35 million. This was partly offset by higher sales volumes and lower costs.

In the first quarter, Saputo generated 36.2 per cent of its revenue and yet 41.9 per cent of its underlying earnings in Canada. This segment faced higher ingredients and operational costs. This overcame the benefits of higher sales volumes and higher selling prices in the export market. Saputo sells its products in more than 40 countries.

The International Sector accounted for 14.5 per cent of the revenue and 14.5 per cent of the underlying earnings. Like Canada, it faced higher ingredients and operational costs.

Saputo writes, “Our goals remain to continue to improve overall efficiencies in all sectors and to pursue growth internally and through acquisitions.”

It’s like a stock split

Saputo plans to also pay a stock dividend. You’ll receive an extra share for each share you now own. It writes that this “has the same effect as a two-for-one stock split.”

Cash dividends are taxable if received outside of a tax-deferred account (such as a Registered Retirement Savings Plan, a Registered Retirement Income Fund, or a Tax-Free Savings Account). But it’s different for Saputo’s shares, even if you hold them outside of a tax-deferred account. Saputo writes: “There will be no Canadian income tax payable by the shareholders with respect to the stock dividend.”

Saputo will pay you the stock dividend on September 29. You don’t need to do anything.

Saputo Inc. (TSX—SAP) remains a buy for long-term share price gains and rising dividends.



The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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