Cranswick Rewarded Investors With A 22% Dividend Increase!

Published by Nick Mackintosh on

  • Cranswick is 1 of the largest meat suppliers in the UK
  • The company is known for its food being amongst the highest quality
  • It has 28 years of dividend growth and shows no sign of slowing down!

Introduction

Cranswick began in the 1970’s when a group of farmers began to produce quality pig feed together and in the 1980s they moved into food production, giving them one of the first “farm-to-fork” offerings. This is very favorable in our current climate where people are conscious of where their food has come from and how it was made. Customers and investors can rest assured that Cranswick remains an ethical business and the welfare of its animals is the company’s top priority.

Business Overview & Strategy

The company’s focus has always been to maintain its authentic and quality products while growing organically. The company’s operations are still only based in the United Kingdom, so logistically the business is extremely efficient which is key when handling fresh produce as it usually has a low shelf life.

The company is looking to grow by opening a new processing facility in Suffolk for its poultry division, a new product-line facility in Bury, site upgrades in Hull and Ballymena for its fresh pork division and expand its pig herd in Norfolk.

Financials

In the presentation of Cranswick’s annual report, we can see that the company has grown revenue by an impressive 17.6% with like-for-like revenue of 12.7% if we exclude previous acquisitions. The figures for the margins, operating profit, and earnings per share are all adjusted due to a 53 week reporting year and the acquisitions being less than 1 year old.

I’m going by the statutory figures which showed the operating profit 13.5% higher from £77.5 million to £88 million and earnings per share grow 11% from £1.24 to £1.37.

2014 2015 2016 2017 2018
Total Revenue (M) £995 £1,003 £1,016 £1,245 £1,465
Operating Income £56 £54 £63 £78 £88
Operating Margin 5.63% 5.38% 6.20% 6.27% 6.01%
Net Income £43 £41 £45 £67 £70
Net Income Margin 4.32% 4.09% 4.43% 5.38% 4.78%
Free Cash Flow Per Share £0.65 £0.67 £1.00 £0.52 £1.04
Dividend Per Share £0.320 £0.340 £0.375 £0.441 £0.537
Free Cash Flow Payout Ratio 49.23% 50.75% 37.50% 84.81% 51.63%

As you can see the margins have steadily improved over the last 5 years in a tough sector as food generally has the lowest margins. Free cash flow has trended upwards and the dividend is safe as its usually within the 50% range. Another great point to mention is that the company has no long-term debt on its balance sheet, so the remainder of the company’s free cash can be put aside until an opportunity presents itself.

Conclusion

As mentioned in the strategy section, the company is increasing capital expenditures in order grow, so from a free cash flow standpoint, it is hard to value the company. Most companies still in the growth phase are valued based on the PEG ratio based on price to earnings and then dividing that by the company’s growth.

Analysts over at Yahoo are predicting 5.8% annual earnings growth over the next 5 years, and with a current PE ratio of 24.67 based on the current share price of £33.80, the PEG ratio is a staggering 4.25!

If we were valuing the company based on its cash flow generation and assumed the company was no longer in its growth phase, we would wait for a free cash flow yield of 10%. The share price would have to fall to £10.40 before we would consider buying or a 69% drop from its current price. This is unlikely to happen unless a major stock crash occurs.

If we wanted to buy solely on the company’s dividend and expect its dividend growth to eventually slow down to the high single-digits to match the analyst’s growth outlook, we would look for a yield of 3-4% which is normal for a consumer stock. To do this we would take the current dividend of £0.537 and divide it by 0.03, meaning we need a share price of £17.90 for the dividend to yield 3%. The fact that we would need a 47% decline to buy should be enough evidence to show this stock is overvalued and should be avoided for the time being, even with its impressive growth record.

Unfortunately, there is no more meat left on the bone to receive a juicy return!

 


Nick Mackintosh

My name is Nicholas Mackintosh and I’m the Creator and Founder of HelpingTheLittleGuy.com I created this website to help anyone looking for a way to save and earn more with their money. Knowledge is given freely in order to give you a fair shake in a system that is determined to keep you poor, preventing you from having the lifestyle you deserve.

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