Sonoco Products Co. (SON) provides packaging, industrial products, and supply chain services to its customers. Its solid earnings and dividend growth rates make it an attractive income play, says Bob Ciura, editor of Top 10 Dividend Elite.
Sonoco Products is composed of two business segments: Consumer Packaging and Industrial Paper Packaging. Its end-markets include appliances, electronics, beverage, construction, and food. The company produces about $7.5 billion in annual revenue and has a current market cap of $5.9 billion. Sonoco also has an impressive 40-year streak of dividend increases.
Sonoco reported fourth-quarter and full year earnings on Feb. 8 and the results were mixed. Revenue was up 16% year-over-year to $1.67 billion, but that missed estimates by $110 million. Adjusted earnings-per-share came to $1.27, which was up sharply from 90 cents in the year-ago period and two cents ahead of estimates.
For the year, the company reported 30% higher revenue to $7.3 billion. Earnings per share came to $6.48, which was up sharply from $3.93 in 2021. In the fourth quarter, Consumer Packaging revenue soared 49% to $879 million, due primarily to the Ball Metalpack acquisition. That acquisition was lapped in Q4, and therefore will become part of the comparable base going forward. We forecast $5.80 in earnings-per-share as an initial estimate for this year.
Sonoco Products operates in a cyclical industry, which is reflected in the company’s performance during the Great Recession. Earnings-per-share totaled $2.13, $2.38, $2.24, $1.78, $2.34, and $2.29 for the 2006 through 2011 period. Earnings-per-share fell 25% from 2007 to 2009 but did make a new high the next year.
Since then, bottom-line growth has been mostly in an uptrend. Sonoco Products’ dividend grew 6% from 2007 to 2009. The company has increased its dividend for 40 consecutive years. This includes several recessionary periods. We expect growth to continue as the expected payout ratio is just 34%.
Overall, Sonoco Products has seen earnings-per-share growth of ~5% over the last decade. We feel that a 5% annual growth rate is achievable given the company’s performance over recent years and its ability to overcome inflationary pressures.
Shares of the company were recently trading at 10.3 times the midpoint of revised guidance for the year. With a target valuation of 16 times earnings, this implies a meaningful contribution from multiple expansion. Reaching our target P/E would add 9.2% to annual returns over the next five years.
We expect Sonoco Products to provide a total return of 16.8% per year over the next five years, stemming from a 5% earnings growth rate, a starting yield of 3.3%, and a large contribution from multiple expansion
Recommended Action: Buy SON.
