Sonoco Products (NYSE:SON) is a dividend aristocrat that provides all different kinds of packaging services and has done so since it was founded all the way back in 1899. SON has been raising its dividend consistently since 1981 and continues to do so. With a scary market like we have going into 2016, stable businesses like SON that pay a nice yield that can be relied on year in and year out become attractive investments.
With a forward P/E of only 14, which is far lower than the overall market average P/E of 19, even after the recent and ongoing sell off, SON is trading at a conservative valuation. One of the reasons great investors like Warren Buffett have done so well over the long term is that many of them outperform the market during downturns which allows them to continue growing their portfolio's from a larger base. While it's not as sexy as owning high flying tech stocks that show huge growth figures during bull markets, the reality is that over the long run these more "boring" stocks tend to outperform their more exciting counterparts by plugging away year in and year out.
SON is the world's largest producer of composite cans, tubes and cores. These products are relied upon by virtually every industry in the world making SON's cash flow very stable and a good stock to own in all market environments. The company has a reputation for high quality and trust worthiness and they even ranked No. 1 in financial soundness in the packaging and container sector in Fortune's 2013 edition of World's Most Admired Companies. Ranking at the very top of the industry for financial soundness is an accolade that should warm investor's hearts. After all, at the end of the day, what we want to see in a potential investment is strong financials that show the company can weather various market storms and keep our capital safe. It is clear that SON is one such company.
There are other benefits to preserving capital during bear markets other than the obvious one - nobody likes losing money. Namely, investors with this approach can sleep well at night knowing that pretty much no matter what happens their capital will be safe over the long term and they can pretty much just forget about their investment until sometime in the future when it is time to start harvesting it. Charlie Munger calls this "sit on my ass investing." As eloquent as Mr. Munger's witticism is, he makes a really good point.
By investing passively in products that have inelastic demand, meaning they will be purchased in similar quantities almost no matter what is happening in the macro economy, the investor simply has to wait. For many people this is actually more difficult than being active. But research has shown that most investors will get better results by being more passive because it is time that is your friend in the end. This approach has the added benefit of allowing you to not follow the market every day which is the cause of most investor anxiety and stress, and who needs that?
SON has a price to book of only 2.59, which is another indication of the stock's relatively low valuation. And the business is efficient, with an ROE of 15% and ROA of 6.38%. In addition, SON has a current ratio of 1.44, which shows that it can easily meet its short-term liability obligations. On the negative side, the most recent earnings report showed negative quarterly YoY revenue growth of -1.60% and earnings growth of -34.5%. While the earnings growth looks bad, it was mostly due to large one-time costs that showed up on that quarter's income statement, so the more important figure is the revenue number which shows that growth was basically flat.
For a conservative dividend payer we don't exactly expect runaway growth so these numbers shouldn't worry investors too much. More important is cash flow and the ability of the company to both continue raising the dividend and performing in such a way that the shares slowly gain value over time. For example, if the stock appreciates at a modest rate of 5% annually over the long term, but also produces an average dividend of 3.62%, the investor will enjoy an 8.62% return on investment if he reinvests all of the dividends.
And while the average return of the major indexes over the last 100 years or so has been around 9%, experts expect this average return to decline in the 21st century. So buying dividend paying stocks that provide some cash flow no matter what is happening to the broader market increases your chances of achieving an adequate return when you reinvest all dividends back into the stock. This is a smart long-term strategy for today's market and with SON you have a high probability of achieving the intelligent investor's goal of safety of principal and an adequate return.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.