Packaging Solution with a Bond-size Yield

03/09/2010 11:04 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says Sonoco Products seeks more growth, but also pays a fat dividend.

Sonoco Products (NYSE: SON) is a packaging products company [that] serves consumer and industrial end markets in 85 countries, but more than 60% of sales are produced within the US and about 20% in Europe.

The Consumer Packaging segment accounted for 43% of 2009 net sales. This segment manufactures rigid packaging made of paper, blow molded plastic, and thermoformed plastic. It also makes printed flexible packaging, ends, and closures. It serves a variety of end markets including food and beverages, health and beauty products, household chemicals, industrial chemicals, pharmaceuticals, and automotive fluids. The company also offers brand artwork management services.

The Tubes and Cores/Paper segment accounted for 37% of net sales. It makes paperboard tubes and cores for film, metal, paper, tapes, labels, textiles, and shipping and storage applications. It also offers recycled paperboard, linerboard, boxboard, and recovered paper.

The Packaging Services segment accounted for 12% of net sales. Supply chain management services include custom packing, package filling, and scalable service centers. This segment also designs, manufactures, and assembles point-of-purchase displays.

SON unveiled a five-year plan at the end of 2007. One goal is to shift the sales mix to 60% consumer and 40% industrial. Management's intention is to focus on faster growing and less volatile markets and reduce exposure to more cyclical industrial businesses.

Although this strategic decision proved prescient as the global economy sank into recession, it could not entirely shield the company's fortunes. Volumes fell, especially to industrial customers, and net sales in 2009 declined 12.7% year over year to $3.6 billion. Profit margins contracted as lower volumes and higher pension costs offset productivity improvements and a favorable price-to-cost differential. Pro forma net income fell 20.6% to $179.8 million, or $1.78 per share.

However, restructuring activities aimed at reducing fixed costs and increasing productivity are yielding benefits now that volumes are rebounding. Fourth-quarter net sales grew 7.2% year over year to $1 billion as the company's three largest segments reported higher volumes. The gross profit margin expanded 242 basis points to 19.35%. Excluding restructuring charges and the impact of a tax law change in Mexico, pro forma net income jumped 20% to $58.9 million or 58 cents per share, exceeding the high end of the company's earnings guidance by six cents.

The full-year outlook remains promising. Management even increased earnings guidance for the year from $1.95-$2.00 per share to $2.00-$2.15 per share [because of] lower-than- expected pension costs and higher-than-expected volumes. Even with a modest shortfall, cash flows should remain strong. Furthermore, the stock pays a generous dividend and we would not be surprised if the board of directors saw fit to increase it soon. (Sonoco closed Monday at around $30, for a dividend yield of 3.6%-Editor.)

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