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Seeing Dividends Clearly—and Growth, Too
06/01/2010 11:19 am EST
Josh Peters, editor of Morningstar DividendInvestor, and analyst Thomas Mullarkey find a dividend-paying packaging company with a nifty new product that could boost profits.
You can see a Bemis (NYSE: BMS) product in just about every aisle of your local grocery store and not even know it.
About 70% of Bemis' revenue comes from packaging solutions for foods and beverages, and 15%-20% is derived from packaging for consumer, health care, and industrial products.
Bemis competes with many other firms in the flexible packaging market, includingSealed Air (NYSE: SEE), Sonoco Products (NYSE: SON), and Winpak, but a strong material science portfolio allows the firm to develop unique packaging products that endow it with a narrow economic moat.
Its new FreshCase films [are] capable of greatly extending the shelf life of beef, pork, and poultry, which will reduce the amount of waste and price markdowns at the retailer.
Currently, most of Bemis's meat packaging centers on processed meats. If FreshCase film is approved [by regulators] and gains wide market acceptance, it will not cannibalize Bemis's own sales, but rather poach away much of its competitors' (such as Sealed Air's) fresh meat packaging business.
Bemis's pressure-sensitive material segment is not as attractive a business and has typically garnered low- to mid-single-digit operating margins. Products include labels and graphic products, such as signage materials and vehicle wraps.
While we doubt this segment can earn its cost of capital over an economic cycle, it now makes up only around 10% of Bemis's sales and an even smaller portion of profits and should not materially hinder the firm's long-term progress.
Bemis wisely financed much of the [recent] Alcan acquisition with new common equity; debt is 46% of total capital, and other metrics remain solidly investment grade. The firm targets a dividend payout ratio between 35% and 45%. Based on management's 2010 forecast, disbursements will land at the top end of this range, but we believe this target provides healthy security, given the modest variability of operating profits.
Acquisitions aside, we expect Bemis's flexible packaging segment to grow at 3%-5% per year, as unit shipments and pricing in mature markets inch upward, per capita packaged food consumption in Latin America increases, and food producers shift towards higher-value packaging solutions. We also anticipate a modest rebound in profit margins as operating costs are cut following the Alcan deal.
Though the dividend is unlikely to resume more than nominal rates of growth until the payout ratio falls into the 40% area, a resumption of share repurchases or smaller, bolt-on acquisitions in future years rounds out our long-run dividend growth forecast of 7.5% annually.
At our Dividend Buy price of $25, representing a 24% discount to our $33 fair value estimate, Bemis shares would yield 3.7% (nearly double the market average), with an annual total-return potential of about 11%. (The shares closed below $29 Friday—Editor.)