Saputo offers capital gains and growing dividends

Consumer goods stock Saputo Inc. earned record profits again in fiscal 2017. It’s expected to earn record profits this year and next. The company is a ‘dividend aristocrat’. It remains a buy for further long-term share price gains as well as modest, but growing, dividends.

consumer_stocksMontreal-based Saputo Inc. (TSX—SAP) earned record profits in the year to March 31. But since the market expected it to do even better, its share price slipped. The company is expected to earn record profits again in fiscal 2018 (which began April 1) and fiscal 2019. It remains a ‘dividend aristocrat’. This blue chip stock is a buy for further long-term share price gains and modest, but growing, dividends.

Saputo “produces, markets, and distributes a wide array of dairy products . . . including cheese, fluid milk, extended shelf-life milk and cream products, cultured products and dairy ingredients. Saputo is . . . the largest cheese manufacturer and the leading fluid milk and cream processor in Canada, one of the top three dairy processors in Argentina, and among the top four in Australia. In the US, Saputo ranks among the top three cheese producers and is one of the largest producers of extended shelf-life and cultured dairy products.” Given Canada’s archaic supply-management regime, it’s wise of Saputo to diversify abroad. The U.S. now accounts for 52 per cent of its revenue of $11.163 billion and 57 per cent of its underlying earnings of $1.29 billion.

Earnings jumped by 18 per cent to a record

In the year to March 31, Saputo earned $731 million, or $1.84 a share, excluding one-time items in both years. This was up by nearly 18 per cent from earnings of $627 million, or $1.58 a share, the year before. The company bought back some of its shares.

In fiscal 2017, Saputo’s cash flow advanced by 19.6 per cent, to $1.071 billion. This confirms its higher earnings. Even better, the cash flow exceeded the company’s needs: net capital investment of $318 million; investment of $87 million to buy the rest of Australia-based Warrnambool Cheese and Butter Factory that it didn’t already own; and dividend payments of $226 million. Saputo’s excess cash flow of $440 million exceeded net buybacks of  $350 million. Saputo’s capital investment of $318 million comfortably surpassed its depreciation and amortization of $207 million. This underlines its growth.

Saputo uses its growing earnings and cash flow to raise its dividend each year. It has done so since fiscal 2000. During that 17-year period, the dividend soared 20-fold from three cents a share in fiscal 2000 (adjusted for three two-for-one stock splits) to 60 cents a share today. Despite this huge increase, the dividend yields a modest 1.36 per cent. That’s because Saputo’s shares have jumped so much.

We expect Saputo to keep raising its dividend each year. For one thing, it holds cash of $251 million. For another, the company’s net debt-to-cash-flow ratio is 1.3 times. This is within our comfort zone of two times or less. Over the past year, Saputo cut its debt by $124 million. It’ll remain a ‘dividend aristocrat’ as long as its earnings and cash flow rise.

Its earnings keep setting new records

Saputo seeks to continuously improve its operations. It invests to reduce its costs and expand its sales. This leads to growing earnings.

Saputo writes: “We intend to continue expanding and modernizing our plants, with investments in equipment and processes designed to increase efficiency.” This enables it to profit as a low-cost producer.

Saputo also seeks to grow within existing markets and to enter new ones. For instance, this year it will complete a strategic capital project to increase its blue cheese production capacity in the U.S. The company will invest to expand its Australian operations. It also plans to develop additional international markets.

Saputo will continue to take steps to improve its profits. In fiscal 2018, its earnings are expected to climb by 12 per cent, to a record $2.08 a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E ratio of 21.3 times. Next year, the company is expected to earn $2.25 for a P/E ratio of 19.7 times This seems reasonable for a company with steady earnings growth.

Saputo is a blue chip consumer goods stock to buy for 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 16, 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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