In surprising news, Popeyes is reportedly the second largest chicken restaurant chain in the U.S. by market share, according to Barclays. The fast-food chain is owned by Restaurant Brands International and recently took the silver trophy from Yum! Brands' KFC.
Even though Popeyes and KFC are popular chicken restaurant chains, the research from Barclays shows that both continue to lose market share to the undisputed winner of the space: Chick-fil-A.
Since it's clearly one of the most successful restaurant companies in the world, many investors wish they could buy stock in Chick-fil-A. However, it's not publicly traded. But don't despair, because there's still one way to participate in the company's success. And many investors know nothing about it.
The dividend stalwart for Chick-fil-A lovers
Tell a Chick-fil-A worker "thank you," and you almost always hear "my pleasure" in reply. But dividend payments from this stalwart may be even more predictable than that.
According to management, Lancaster Colony(NASDAQ: LANC) is one of only 13 companies that's paid and increased its dividend for at least 60 consecutive years, landing it on the lauded list of Dividend Kings. And in March 2020, the company partnered with Chick-fil-A in what proved to be a very successful trial venture.
Lancaster Colony has its own portfolio of food brands, and its sales are split pretty evenly between retail channels (including grocery stores) and food-service partners. Over the last 12 months, 35% of its retail sales came from frozen bread and 21% came from refrigerated salad dressings and similar products.
The rest of Lancaster Colony's retail sales come from shelf-stable dressings and sauces. And that's where its partnership with Chick-fil-A comes in.
Lancaster Colony licenses the Chick-fil-A brand to sell the restaurant's popular sauces in grocery stores. And the partnership has been a runaway success. After it started licensing Chick-fil-A's brand, revenue growth spiked to its fastest rate in years, as the chart below shows.
LANC Revenue (Quarterly YoY Growth) data by YCharts
Thanks to the success of its sauces in grocery stores, Chick-fil-A is now a huge part of Lancaster Colony's business. During the company's fiscal 2023 (which ended in June), Chick-fil-A accounted for 26% of Lancaster Colony's sales.
Given that Lancaster Colony had net sales of more than $1.8 billion in its fiscal 2023, Chick-fil-A is nearly a $500 million business for Lancaster Colony.
For what it's worth, Lancaster Colony's partnership with Chick-fil-A isn't a one-off. The company has similarly started licensing other brands including privately held Arby's and Buffalo Wild Wings as well as Olive Garden of Darden. And a new partnership with Texas Roadhouse launches next year.
What to expect with a Lancaster Colony investment
When thinking of Lancaster Colony as an investment, one word immediately comes to mind: reliable.
Lancaster Colony's reliability starts with its 60-year dividend track record. But I believe it's significant that the company is also debt-free. In fact, it's the only debt-free company among those that have paid and increased a dividend for at least 60 consecutive years.
Therefore, Lancaster Colony is on solid financial footing. That said, its dividend payout ratio is getting high at 83%. This means it's returning most of its profits to shareholders as it is. And this could prevent it from raising its dividend in future years, unless the company finds ways to grow profits.
Additionally troubling, Lancaster Colony's gross-profit margin has struggled ever since it started licensing brands, as the chart below shows.
LANC Revenue (TTM) data by YCharts
This could be because Lancaster Colony's facilities weren't equipped to handle the sudden surge in production volume. But this could prove a temporary problem. Management believes its gross margin can start improving again thanks to its new manufacturing facility in Kentucky.
Adding it all up
Even if Lancaster Colony can keep licensing new sauces from popular restaurant brands, I believe it's reasonable to assume it will have only modest long-term revenue growth. The grocery space is pretty well established, and I don't think there's unlimited opportunity here.
However, it does appear that Lancaster Colony has a chance to improve its profit margins. And that would be instrumental in continuing to grow its dividend, as it has for six decades.
I'm not sure I'd look at Lancaster Colony stock as a market-beating investment opportunity. But it could be right for dividend investors who are looking for a company with a great track record and solid financials.
Beyond that, it could just be fun for Chick-fil-A lovers to invest in Lancaster Colony stock, given how important the fast-food chain is to the business. It's OK to have fun sometimes!
Moreover, it could even be a good stock to gift someone to teach them about investing, since people will likely see the Chick-fil-A-branded sauces during their next stroll down the grocery aisle.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Texas Roadhouse. The Motley Fool recommends Barclays Plc and Restaurant Brands International. The Motley Fool has a disclosure policy.
