A Quiet Dividend Stalwart

08/28/2008 12:00 am EST


Josh Peters

Editor, Morningstar DividendInvestor

Josh Peters, editor of Morningstar DividendInvestor, finds a Midwestern materials company that churns out solid growth.

Despite what seems like a commodity business, Bemis (NYSE: BMS) has shown consistently positive operating performance and strong cash-flow generation, thanks to its focus on product innovation and responsible management that allocates capital well.

Material science innovation is a key principle for [this Wisconsin-based maker of packaging products and pressure-sensitive material], with special focus on increasing the shelf life of food and creating better graphic design capabilities and customer convenience. This offers an attractive value proposition for Bemis's customers, who are willing to pay a premium for these features [and], along with process improvements designed to reduce waste, has helped partly mitigate the impact of rising plastic resin prices.

Patented products and value-added graphic design services are only part of the toolkit used by Bemis to strengthen its business relationships and make switching to a competitor an unattractive option. Bemis's facilities tend to be close to its customers. (For example, one-fifth of Bemis' manufacturing capacity is near dairy farms in Wisconsin.)

With products such as meat and cheese, where ensuring freshness is one of the highest priorities of both the packager and the food supplier, Bemis has used geography to supplement innovation in building its economic moat.

This concentration also creates opportunities for productivity-driven cost savings. As Bemis's plants become more efficient, facilities clustered near one another can be selectively shuttered without diminishing the company's ability to serve customers in the region. A recently completed restructuring program that closed six locations is expected to save the company $17 million annually, which will increase net income by 10%.

Bemis is also active in international acquisitions of food packaging companies, enabling it to grow globally along with its customers and to export its expertise in material science, further leveraging its R&D investment.

Bemis's balance sheet is rock-solid. The firm carries a reasonable debt/capital ratio of 35% and an A credit rating, far better than most of its peers. High raw-material costs have pressured operating margins the past two years, but a payout ratio of 50%-though a bit above management's 35% to 45% target-provides good protection against short-term profit head winds.

The company has raised its dividend for 25 years in a row, and we are confident the dividend will continue growing in the future. Our forecasts call for operating profits to grow roughly 7% annually over the next decade; we also expect the company to repurchase 2% to 3% of outstanding shares each year, but bringing the payout ratio down a bit leads us to estimate 7%-8% annual dividend growth.

With a yield of 3.2% at our Dividend Buy price of $27.70 (it closed just below that Wednesday-Editor), we would expect annual total returns from Bemis in the 10% to 11% range.

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