Andrew Peller (ADW.A.TO) owns wineries in British Columbia, Ontario and Nova Scotia. It doesn’t only produce its own wine, but also market it along with other products. ADW owns several brands like Peller Estates, Trius, Hillebrand, Thirty Bench, Sandhill, Copper Moon, Calona Vineyards Artist Series VQA wines and Red Rooster. Currently the company has an estimated 14% share of its total wine market and a 37% share of domestic wines.
The company is known to grow its revenues through acquisitions. Since 1995, management invested over $114M to purchase 14 vineyards.
Source: ADW Factsheet
The company has built a solid relationship with provincial liquor stores, but also maintain company-owned retail stores in Ontario.
Revenues
Source: Ycharts
Andrew Peller shows a strong and steady growth of its sales mainly due to the creation of multiple products, a strong marketing program and several acquisitions. The Canadian wine business is doing well and ADW continues to ride this bullish trend.
Its recent alliance with Wayne Gretzky vineyard will not only be good for wine sales, but will also open the door to whisky production.
Earnings
Source: Ycharts
Unfortunately, growth came with a price. Over the past 5 years, the company has struggled to increase its EPS. Creating brand awareness is expensive and ADW had to spend significant money in marketing and developing new vineyards. Fortunately, management has put more emphasis on their costs and revised their supply chain to improve their margins.
Source: Ycharts
Dividend Growth Perspective
Source: Ycharts
Wow… such a low dividend yield for this wine company. Does it even make sense to invest? Well, if I sell you that while the yield went down from 3.75% to 1.28%, the stock price surged 260% over the past years, would you be more lenient? The dividend payment also increased by 36% or 6.34% annualized growth rate during the same period.
Source: Ycharts
It is rare that we such low payout ratio with such high cash payout ratio. When I looked at their financial statement, we can see that the company had to invest massively recently, boosting capital expenditure to a record level:
Source: Ycharts
Additional investments have been required notably to open the new Wayne Gretzky Estate Winery & Craft Distillery. This is a 15,000 square foot facility includes a winery, craft distillery, barrel aging cellars, tasting rooms, retail and hospitality facilities, all surrounded by landscaping and vineyards.
I expect the CAPEX to go back down to more reasonable level in 2018. Therefore, there is nothing to worry about the dividend sustainability.
Potential Downsides
The wine industry and the domestic and international market in which the Company operates are consolidating. While this could be a great opportunity, it also brings stronger competitors to the table. ADW must continue investing in its brand awareness to keep its market share.
Since Wine is a luxury product, any economic downturns would affect ADW sales. For now, I don’t think it’s an issue as the Canadian economy has proven to be more resilient than anticipated.
Valuation
After such a great ride on the stock market, is there any money left to be made on ADW? Let’s take a look at how the market valued the stock over the past decade.
Source: Ycharts
In all honesty, ADW seems a bit pricey right now. The PE ratio never stopped growing since 2010. On the other side, we are looking at a company that is continuously reaching for the sky as well. Nevertheless, at a 24 PE, there is no bargain here.
Digging deeper, I’ve used a doubled stage dividend discount model to see if there is value to invest in.
| Input Descriptions for 15-Cell Matrix | INPUTS | |||
| Enter Recent Annual Dividend Payment: | $0.18 | |||
| Enter Expected Dividend Growth Rate Years 1-10: | 9.00% | |||
| Enter Expected Terminal Dividend Growth Rate: | 7.00% | |||
| Enter Discount Rate: | 9.00% | |||
| Margin of Safety | 8.00% | 9.00% | 10.00% | |
| 20% Premium | $27.62 | $13.72 | $9.09 | |
| 10% Premium | $25.32 | $12.57 | $8.33 | |
| Intrinsic Value | $23.01 | $11.43 | $7.57 | |
| 10% Discount | $20.71 | $10.29 | $6.81 | |
| 20% Discount | $18.41 | $9.14 | $6.06 | |
Please read the Dividend Discount Model limitations to fully understand my calculations.
Interesting enough, there isn’t a huge bargain on ADW, but it seems that you would not be left in the field if you buy it now. There is still a small margin of safety of 6-7% at the moment.
Final Thought
When you find a company growing at this pace, it’s hard to no pay a premium. However, it seems the wine isn’t that pricey these days. It could be a good timing to buy some bottles!
Disclaimer: I do not hold ADW.A.TO in my DividendStocksRock portfolios.
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Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.
Mike,
Thanks for the nice analysis. I was not familiar with company until now. I like to have a few “sin stocks” in my dividend stock portfolio. However, I tend to stick with larger cap companies for the stability they provide. Seems like you are a bit hesitant too. Enjoy a few glasses and have a great weekend.
Tom
Sin stock? I thought wine was good for my heart? hahaha!
Great summary Mike. I’ve owned this stock since 1999 when it was trading for $12.50 – prior being split 3 for 1, two times over. So it has rewarded me handsomely. The dividend growth has been steady and that has me now reaping about 10% dividend on my initial investment. I don’t see that slowing down. Furthermore, this is a family controlled and run company with a good team of professionals conducting the operations. So their interests are aligned with the public shareholders.
That’s the good news.
What would probably give me pause before buying more (and I won’t because it is overweighted in my portfolio already!), is that the P/E is getting steep. Also, I have found that the SG&A costs tend to rise disproportionally when sales increase.
I have in the past been critical of the family management, with family members sitting on the board – but the next generation has taken over and in spite of a couple of missteps in trying to hedge US-CAD exchange rates, is doing a good job of driving profit to the bottom line and growing through acquisition.
There is the possibility that this company could be taken over, which would great in the short run, but be sad for me in the long run because it has been a great investment.
John, Excellent insight into the company. Smaller companies have some interesting characteristics, many of which you mention. Congrats on your success with this investment.
Tom
I forgot to mention one of the great benefits of being a shareholder: You get the shareholder price when you buy at the winery. (Nice!) And they make some very good wines.
You just made the final point to convince me! hahaha!