In my most recent article, the final installment of my "Yield, Value, Safety" series, I had identified Greif, Inc. as potential holding, based on a first-pass review. By Monday, 06/11/2012, a number of factors had converged to make an evaluation of Greif, Inc. a matter of some urgency. If I was to ever invest in Greif, it looked like the week ahead would be a good time to do it, so a decision was needed. The aforementioned factors were: both the class A (GEF) and class B (GEF.B) shares had declined more than 20% since early April, with the result being that both were in value-stock territory; the next dividend had been declared, with an ex-dividend date of 6/18/2012, so a purchase had to be made before then if I wanted to receive the upcoming payment; and the most recent quarterly earnings results had just been released, on 6/6/2012, so fresh data was available for analysis. This article will present my approach and findings upon reviewing Greif, and the action that resulted.
One question that I have had with Greif from the very beginning is why are there two classes of stock? What is the difference, and is there any reason why an investor should select one over the other? Going back over the last twenty years of dividend history, I see that both classes existed from the very beginning of the establishment of the new Greif, Inc. in 1995, and that both have paid regularly ever since, with steady increases. I sent an inquiry to Greif Investor Relations, but have not received a response as yet. I finally came across the following from a 6/9/2011 10-Q filing which answered my questions:
Class A Common Stock is entitled to cumulative dividends of one cent a share per year after which Class B Common Stock is entitled to non-cumulative dividends up to a half-cent a share per year. Further distribution in any year must be made in proportion of one cent a share for Class A Common Stock to one and a half cents a share for Class B Common Stock. The Class A Common Stock has no voting rights unless four quarterly cumulative dividends upon the Class A Common Stock are in arrears. The Class B Common Stock has full voting rights.
So the answer is that Class A has a theoretical benefit of cumulative dividends of one cent per year, which is not worth much to me. On the other hand, Class B has a higher yield and, for what its worth, voting rights. So I would choose Class B, although I note that the bid-ask spread is huge, and the average daily volume is very low, so limit orders will need to be used, if I elect to invest.
Greif traces its roots all the way back to 1877, as a wooden barrel and cask firm operated by the Greif brothers in Cleveland, Ohio. Greif today is the largest rigid industrial packaging company in the world, with manufacturing facilities in over 50 countries, nearly 16,000 employees, and operations on all six continents. Although Greif has grown via numerous smaller acquisitions through the years, the acquisition of Royal Packaging Industries Van Leer in 2001 catapulted Greif from a primarily North American firm to its present world-wide presence.
Greif, Inc. is categorized in the GICS classification system as Materials, Metal and Glass Containers, Containers and Packaging. This is by definition a cyclical stock, and revenues are impacted by economic downturns, as evidenced most recently by a revenue and net income dip in 2009, since recovered.
A more detailed review of Greif Inc. from several perspectives will now be presented.
Revenue and Profitability
The earnings detailed on the June 7 Conference Call were for the quarter ending 4/30/2012. While the quarter overall was decent, cash flow improved markedly from the year ago quarter, with cash from operations coming in at $168.2M vs. net income of $60.8M. The CIO, Robert McNutt, emphasized that management was focused on improving cash flow and working capital management, and it would seem their efforts are bearing results. Looking over ten years of revenue and net income, Greif shows both as steadily increasing most years, although dips occurred in both recent recessions, in 2002, and again in 2009. Noteworthy is the fact that the firm never posted an annual loss, and the dip in the firm's results in 2002 was more severe than in 2009, even though the downturn in 2009 has generally been considered the more significant recession, the worst since the Great Depression of the 1930s. Recent margins and returns are not world beating, but are in line with other firms in the same industry. S&P rates Greif a B+ for earnings and dividend quality, which is pretty good for a cyclical stock.
Both the Class A and Class B stocks have paid dividends without interruption since 1996, when Greif was reorganized into its present form, and dividends have steadily increased over the years. The Class B shares currently yield 5.66%, at the closing price from 6/15/2012 of $44.31. The dividend was just increased on 3/16/2012, indicating management confidence going forward. The stock is a Dividend Challenger, with five to nine years of steadily increasing payouts, and is also on the select list of stocks passing a rigorous screen from Investment Quality Trends, a dividend-focused stock advisory newsletter. The next ex-dividend date is Monday, 6/18/2012.
Valuation and Technicals
Both stock classes are in value-stock territory, having declined more than 20% from their early April highs. For perspective, some highs and lows for the B shares are:
Five Year Low $22.13 (11/21/2008)
Five Year High $70.86 (04/07/2008)
52 Week Low $40.55 (10/04/2011)
52 Week High $62.50 (07/07/2011)
Recent High $57.61 (04/02/2012)
Recent Low $44.31 (06/15/2012)
The key price-based valuation metrics all indicate that the stock is a value stock. These values, for the B shares, are presently as shown below:
P/E = 13.6 Price/Book = 1.54 Price/Sales = .47 Price/Cash Flow = 6.35
The stock has a beta of 1.3, implying it is a little more volatile than the overall market. The recent actual volatility is 27%, while the implied volatility, per the front-month at the money options, is 33%. All of the commonly-referenced technical indicators known as oscillators, such as Stochastics, indicate the stock is oversold. The stock is at the lower Bollinger Band. None of these readings are surprising for a stock making a six month low. The take-away from the technicals is that the stock is at an interim low, and now should be an excellent time to buy, IF the stock represents long-term value.
Ratings and Sentiment
Schaeffer's Research, the options oriented website, provides a lot of interesting data regarding the sentiment of options traders towards a stock. Under Schaeffer's contrarian approach, excessive pessimism by options traders and short sellers towards a stock can actually be bullish, at least at extremes. While data is only available for the class A shares, it indicates the sentiment towards the firm. Schaeffer's SOIR rating, a composite put/call ratio of options expiring within three months, is .87, which is a fairly bullish reading. The short interest ratio as of 6/1/2012 is 5.5 days, with 3.3% of the float sold short. This is not an extreme short interest reading, but it does indicate that there are a number of traders with a pessimistic view of the stock's near-term prospects.
As is typical for a small-cap, analyst coverage is limited. Thomson-Reuters indicates there are seven analysts following the firm, with two rating Greif a Strong Buy, one a Buy, and four a Hold. Various other ratings of interest are: Schwab - B, Outperform, Reuters - Outperform, The Street - Buy, Ford Equity - Hold, Columbine Capital - Sell, Thomas White - Buy, and EVA Dimensions - Over Weight. The ratings seem to be weighted towards the positive, with Columbine the only Sell rating. (Ratings data are available from various brokerages where I have accounts.)
I always do a search on Seeking Alpha as part of my stock research, to see if any articles are available which might offer further insights. I only came across one recent article on Greif, entitled "Searching For Rising Dividends: Greif", by contributor K202. The author does not mention whether the price range he discusses references the A shares or the B shares, but I believe he is referring to the A shares. The article came out on 3/8/2012. The author's opinion of Greif is mostly favorable, in agreement with my own, while he mentions some cautions due to the cyclical nature of the sector, with which I also concur. He suggests that investors wait for a cyclical low to enter a position, which he posits will be available later on in 2012. He was definitely (eventually) correct on that suggestion, as the Class A shares have declined from $50.52 on 3/8/2012 to $42.06 on 6/15/2012, while the Class B shares have declined from $51.26 to $44.31 over the same time period. It should be noted that both classes went up another 10% or so after 3/8/2012, before declining.
The continuity of management is very indicative of a stable firm. The CEO/Chairman until 1994, John "Jack" Dempsey, occupied a senior position with Greif an astounding 46 years, and was a mentor for the current chairman and former CEO, Michael Gasser, who has been with the firm since 1979. Mr. Gasser was succeeded as CEO in 2011 by David Fischer, a transition that was long planned. Rob McNutt is the present CIO, taking the post in early 2011, the only senior level executive of the top three that is relatively new to the firm. The firm has a share buyback program that has been in place for some time, authorized originally for four million shares of A or B, in any combination. There are only 816K shares remaining in the authorization. The recent buyback history from the latest annual report indicates that a selective approach is followed, with shares being bought only occasionally. The annual report also notes that Greif has in place a policy whereby senior management is required to own stock in the company, with the ownership stake required related to compensation. The Governance Metrics International (GMI) rating for Greif is a 4, which on a scale of 1 to 5, where higher is better, is excellent. The firm's approach to accounting is Average, which is not as good as Conservative, but certainly better than Aggressive or Very Aggressive, the other available ratings. GMI rates Greif as less risky, from the standpoint of accounting and governance, than 85% of U.S. firms. Note that the GMI ratings are available to me via my account with Fidelity. No known issues exist regarding lawsuits, adverse legislation, SEC actions, auditor concerns, and the like.
Before I conclude, in the interest of full disclosure, I want to note that I am not a financial professional, nor am I certified in any way as a financial advisor. I am an independent, individual investor, focusing on dividend-paying stocks exclusively.
A key issue with a cyclical dividend payer is whether the dividend can be sustained during a downturn. The record indicates that Greif has managed this feat through two recessions since 2000, and actually handled it better in 2009 than in 2002. This indicates to me that it is a stronger company now than it was ten years ago. As noted, the stock is at a six month low. Only the future will determine whether it is a better buy now than it will be in the days ahead, but one thing is certain - it is a better buy than it has been over the last six months. I decided, based upon the analysis, that I would initiate a position in Greif before the end of the day on Friday, 6/15/2012. Reflecting some caution, I further determined that I would start out with my minimum size position, only 25% of the maximum allowable number of shares for any one stock in my portfolio, per my position sizing rules. I will consider adding to the position upon a further decline, should it occur, if the decline is general in nature, with no specific news on Greif, Inc. I thus entered a limit order early Friday morning, with a limit price of $44.25. By 3:00 PM, I was still not filled, so I bumped it up to $44.35. Later, with only a few minutes to go, and still no fill, I bumped it up again to $44.45, and was filled. So, I have a small position, and I will collect my first Greif dividend on 7/1/2012, the payment date for the current dividend. I stated in my article a couple of weeks ago that Greif Class B would be a buy below $45, and nothing in my more detailed analysis indicated otherwise, so I took the plunge.
Disclosure: I am long GEF.B.