If you’ve been hit by the recent market turmoil, shareholders of Premium Brands Holdings Corp. (TSX: PBH) haven’t noticed. Even with market volatility, Premium Brands stock has continued its steady upward march, advancing 63% in the last year versus a decline of 17% for the TSX. This outperformance isn’t a one-time thing either. Premium Brands has beat the TSX for five straight years and is up over 175% since 2011.
Why haven’t shares been subject to recent market declines, and can investors count on this to continue?
A staple industry
Premium Brands bills itself as a specialty food company, selling its products via retail outlets (60% of sales) as well as supplying food service companies such as restaurants (40% of sales). Selling to both of these outputs provides a natural form of diversification.
If consumer spending declines at restaurants, people are most likely buying more food at grocery stores. And when the economy is doing well and consumers are going out more, restaurant spending usually ticks up. Premium Brands has a solid position in both of these channels.
As a specialty food company, Premium Brands has targeted value-added products that aren’t commoditized. So instead of selling simple canned items like vegetables, fruit, or meat, it finds ways to package and produce items in a way that garners higher margins. For example, one of its biggest sellers is pre-made sandwiches (20% of sales). Selling the entire sandwich pre-made typically comes at a higher profit than when selling each component separately.
In all, Premium Brands’s success has come from operating in an incredibly stable industry with an added layer of diversification and profitability.
Weak loonie is also a plus
While a lower currency valuation has hurt many importers, it’s actually been a blessing for Premium Brands. A weak loonie means that it’s actually cheaper for U.S. citizens to buy Canadian goods than their own. In 2010 U.S. sales were less than $50 million. Last year, it surpassed $220 million. This has helped total sales grow at a 23% annual rate since 2010, outpacing the company’s long-term target of 6-8%.
Even with sales exploding, management has been able to keep returns steady. In the past five years the company has had a return on assets between 12-14% ever year. That’s remarkable stability for company expanding as quickly as Premium Brands.
Get ready for big dividends
Consistently rising sales and profits have resulted in impressive free cash flow growth. In 2006 free cash flow was under $1.40 a share. A decade later it’s close to $3 a share. Meanwhile, dividends have been roughly flat at only $1.38 a share, resulting in a 3.6% yield. Management could double the payout while still having excess cash.
If you’re an income investor looking for a stable dividend with growth potential, there are few better ideas out there than Premium Brands.
