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WestRock: Solid Growth, High Yield
10/16/2019 5:00 am EST
WestRock is a dividend grower; that high yield is only the start. It is also the largest pulp and packaging company in the country. Size is an advantage in a business with high fixed costs like paper-and-pulp production.
After Rock-Tenn and MeadWestvaco combined in 2015 to form WestRock, $1 billion of annual expenses have been purged from the business.
The more efficient you run, the more customers you attract. WestRock sold $16.3 billion of its paper and packaging products in fiscal-year 2018 (which ended in September). Annual revenue has grown by $6 billion annually since the merger.
WestRock shares are down 43% compared with the price a year ago. Global growth worries and consumer spending trends weigh on paper-company shares (and the market as a whole).
The near-term industry outlook is weak, but WestRock’s business is strong. Cash flow is worth highlighting. It is the key metric in the paper-products industry. WestRock’s free-cash-flow yield exceeds 10%. The yield provides ample support for the current dividend and future increases.
Analysts give considerable weight to the EV/EBITDA multiple. WestRock’s EV (equity value plus debt less cash on hand) is $18.7 billion. EBITDA (earnings before interest, taxes, depreciation, and amortization) was $2.95 billion for the trailing 12 months.
WestRock is valued at 6.3 times EBITDA, which isn’t much. The shares trade at a discount to its three-year EV/EBITDA multiple of 7.0. The shares trade at a wide discount to the peer-group multiple of 8.6.
Management guided for EBITDA to post between $880 million and $925 million for the fourth quarter. This compares favorably with EBITDA of $858 million in the third quarter and $802 million in the year-ago quarter.
WestRock CFO Ward Dickson chimed in with his bullish perspective. “To be clear, we will generate a lot of free cash flow in this business,” said Dickson. “We will invest over $1 billion in these projects. And they are going to generate approximately $240 million worth of incremental EBITDA that will flow through to both earnings and cash flow generation for us.”
Dickson added, “We do believe that the dividend yield and the free cash flow yield of WestRock is one of the compelling points of our valuation.” We concur. WestRock trades at dirt-cheap multiples compared with its historical multiples and those of its peer group.
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