The Stock: Avery Dennison Corporation (NYSE:AVY)
Today I wanted to take a look at a company whose products you interact with on a daily basis, whether you realize it or not. Avery Dennison is one of the power houses in the display graphics, labeling, and packaging materials industries. Whether the packaging is on display in an advertisement on a bus terminal, is a part of a label/tag on the pair of jeans you recently purchased, or on a car part that the consumer may likely never see on their vehicle, Avery Dennison’s expertise is far reaching and impacts our day to day life. Companies like this excite me and I am always on the hunt for a potentially undervalued dividend growth stock that will increase my portfolio's dividend yield - especially given the fact the company's stock price is down ~10% YTD. However, despite the company's strong recent performance and a few other metrics to be discussed, I am not buying shares of AVY at the moment due to two key metrics. Those metrics are the company's low dividend yield and the fact that they have increased their dividend for only seven consecutive years.
AVY last released earnings at the end of January and the company had many things to like in the earnings release. In the fourth quarter, net sales increased 11.9% compared to the prior year, and the company’s net sales increased 8.7% in fiscal year 2017. Further, the earnings release also highlights that each of the company’s three major segments (Label and Graphic Materials, Retail Branding and Information Solutions, and Industrial and Healthcare materials) posted increases in their organic net sales. The company’s overall sales figures are impacted by both organic sales and growth due to currency fluctuations, so it is always great to see strong organic growth figures in these segments.
The company’s EPS experienced a large hit due to the impact of tax-reform; however, this is a one-time impact on the company’s earnings and management stated in their press release that they expect the company’s marginal tax rate to be in the mid-20 percent range going forward. Despite the one-time tax impact, management stated that "2017 marked the company’s sixth consecutive year of strong top-line growth, margin expansion, and double-digit adjusted EPS growth. Strong top-line performance in 2017 reflected a balance of contributions from acquisitions and organic growth, driven by our focus on faster-growing high value categories and large presence in emerging markets.”
FY 2017 EPS (adjusted to exclude tax reform) was $5.00/share. In 2018, management is expecting another strong growth in the company’s earnings. Management’s expected EPS range is $5.50 to $5.75/share without adjustments for restructuring. Even if the company meets the low range of their EPS estimate, earnings will grow by 10%. Again, another strong year is expected and hopefully the company can deliver.
As a dividend growth investor, I'm always looking for another great dividend growth stock. I consider AVY a low dividend yield, high dividend growth rate stock given the company's sub-2% dividend yield and their recent double-digit dividend growth rate. Since the company's earnings are expected to grow by 10%, I wanted to see if we could expect 10% increases in dividends as well. This is where I started diving into the numbers. In the company's recent Investor Presentation, it was stated that management is expecting to return ~$950m in dividends during the five year period of 2017 - 2021. In their 2017 Annual Report, it was stated that the company paid $155.5m in dividends in 2017. Assuming no share repurchases, if AVY increased their dividend 10% annually, the company would pay $949.3m in this 5 year period. Interesting, it seems as if management is planning on double digit increases (barring any changes, of course, which is important to note as a lot can change over the period and dividends are never guaranteed).
Now here is the fun part. It is time to run AVY through the Dividend Diplomats’ Stock Screener to see if the company currently passes our investment filters used to identify undervalued dividend growth stocks. Our stock screener uses three simple screens to identify the stocks: P/E Ratio (valuation), dividend payout ratio (company's ability to continue growing their dividend), and their dividend growth rate/history of increasing their dividend (as we focus on company's the have demonstrated their ability to increase their dividend over a long period of time). If a company passes our screener, and a few other metrics, we will consider purchasing. Here are the results of our screener:
|Ticker||Price - 4/6/18||Forward EPS||Annual Dividend||Yield||Payout Ratio||5 Yr DGR||P/E Ratio|
1.) Dividend Yield: Typically, I look to invest in companies with dividend yields exceeding the S&P 500. Otherwise, I would consider investing in a nice, diversified S&P 500 fund. Even with the company’s 10% decline in 2018, AVY’s current dividend yield is only 1.74%. This is a hair below the current dividend yield of the broader market.
2.) Payout Ratio: With a low dividend yield, I would expect AVY’s payout ratio to be significantly lower than the 60% threshold that we use in our screener. It looks like my expectations were met as the company’s current payout ratio is 32.73%. Boom, AVY passes this metric and thus, there is a lot of room for management to continue increasing their dividend going forward.
3.) Dividend Growth Rate and History: AVY has beeing paying a dividend since the mid-1960s. However, the company has only increased their dividend for seven consecutive years. Typically, like most dividend growth investors, I love investing in Dividend Aristocrats or companies that are well on their way towards earnings the coveted title. AVY still has a long way to go to earn this title, but it is encouraging to see dividend growth for the last seven years. Similar to the expectations I set for a low payout ratio, I would expect AVY to have a strong annual growth rate due to their low dividend yield. This box is checked based on the company’s five-year average dividend growth rate of 10.88%. And as I showed earlier, there is a good chance that management can maintan a double-digit dividend growth rate going forward. However, I'm not giving this metric an outright pass due to the fact that the company has only increased their dividend for 7 consecutive years and I tend to focus on companies with longer dividend increase streaks.
4.) Price to Earnings (P/E) Ratio: I’m always looking for companies that are trading at a multiple below the broader market. This is our primary valuation assessment to help determine if the company's current stock price is undervalued or if the company is overpriced. If overpriced, we will clearly stop our analysis in its tracks. In terms of AVY, their current P/E ratio is 18.76. With the broader market having a P/E ratio in the mid-20X, AVY’s multiple is below the broader market. Thus, AVY passes this metric.
Dividend Stock Analysis Conclusion
Another interesting stock analysis here and we have had several interesting analyses over the last couple of months. AVY is a low-dividend yield, high dividend rate growth stock that would represent an industry that is lacking in my current portfolio. The company has had strong operating results and dividend growth over the last several years; however, the company does not currently have a long streak of increasing their dividend annually, and their current dividend yield is below the broader markets (which as I mentioned earlier, is an objective of potential investments). Therefore, I am going to pass on initiating a position in AVY at the moment. However, I am going to be watching this potential May dividend increase very closely and the company’s performance over the next month very closely as their dividend yield could increase significantly if the price continues to fall and management announces yet another double-digit dividend increase.
Do you currently own AVY? What do you think of their current valuation? Are you expecting a double-digit percent dividend increase as well in May?
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.