Enticing Package Down Under

01/12/2010 9:20 am EST


Carla Pasternak

Editor, The Income Investor

Australian packager Amcor offers a hefty, secure yield at a discount, writes Carla Pasternak in High-Yield International.

Amcor (OTC: AMCRY) is Australia's biggest packaging company and the second largest in the world. It makes paper cartons, aluminum and steel cans, plastic and glass bottles, and other packaging. It has the number-one share of the cardboard packaging market in Australia, and is the world's biggest maker of plastic soft-drink bottles.

Based in Abbotsford, this global packager has 226 factories in 34 countries around the world. Australia and New Zealand account for 24% of sales, and the rest of the world contributes the remaining 76%.The plastics division is the largest, contributing about a third of revenues.

Amcor pays dividends twice a year, in April and September. Payments totaling $1.06 per ADR in 2009 give the stock a trailing yield of close to 5%. However, thanks in part to the rise in the Australian dollar over the past year, the next dividend in early 2010 will be worth an estimated $0.85 per ADR, according to Bloomberg forecasts. That, together with September's payment of $0.59 per ADR, gives the shares a projected yield of 6.5%.

Dividends of A$284.2 million in 2009 on profits (before extraordinary items) of A$360.5 million gives a payout ratio of about 80%. Earnings have been relatively stable over the last few years. The company's business is fairly recession-proof, with most of its packaging sales going to such multinational customers in consumer staples as Nestle (Zurich: NESN), Unilever (NYSE: UN, UL), and Cadbury-Schweppes (NYSE: CBY).

The company has long-term contracts of three to five years with many of these customers, ensuring steady earnings and dividends. Amcor's dominant position in the specialty plastics and flexible markets also gives it a competitive edge when it comes to buying raw materials and product pricing. The company is well capitalized, with debt of $2.64 billion, less than 50% of total capitalization and interest coverage of six times earnings.

Earnings are expected to climb 19% in 2010. The pending A$2.4-billion acquisition of packaging assets from Rio Tinto (NYSE: RTP) will contribute to this growth.

Rapidly rising raw materials costs, such as for petrochemical-based resins, could crimp earnings, especially if higher prices can't be passed on to customers. However, over the past three years, the company has sold more than $1.5 billion in assets and moved production to Mexico and other lower-cost countries to keep profit margins steady at about 5% of sales.

Revenues could also be weighed down by the strengthening Australian dollar. The majority of revenues are in US dollars or euros, which are worth less when repatriated into stronger Australian dollars.

However, the reverse is also true if the Australian dollar weakens.

Amcor is in a stable business which supports a relatively secure income stream. The shares have more than doubled from their March lows, but still offer around a 20% discount to their 2008 levels. For yield-seeking investors looking to hedge against the US dollar, AMCRY could be a good fit.

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