Schweitzer-Mauduit International (SWM) is an undercovered gem that has been a reliable dividend stock for its current shareholders, and it is currently trading at a valuation that permits prospective shareholders to get this stock at a bargain price.
Schweitzer-Mauduit International started out as a paper mill in Renaissance-era France. Image provided by Schweitzer-Mauduit International.
From its humble beginnings in 1545 as a French paper mill, Schweitzer-Mauduit International today is a provider of engineered paper solutions and advanced materials, and divides its operations between these two sections. The engineered paper segment sells cigarette paper and reconstituted tobacco leaf to manufacturers of cigars and cigarettes, while the advanced materials segment makes resin-based films, nets, and related products which have applications in construction, filtration, industrial and medical fields. That the business model is a viable one was confirmed again when the Alpharetta, Georgia-based firm recently released its Q4 and full-year results for the 2019 financial year, which continued a trend of consistently rising revenue that has been evident over previous years.
|Year||Revenue ($)||Net Income ($)|
|2015||775.2 million||90 million|
|2016||845.8 million||82.3 million|
|2017||981.7 million||34 million|
|2018||1.04 billion||94.2 million|
|2019||1.02 billion||85.8 million|
Figures collated from annual reports available on Schweitzer-Mauduit International's investor relations page.
Net income figures have been relatively steady in the same period with the exception of 2017, which was affected by the Tax Cut and Jobs Act being signed into law in December 2017. As a consequence, Schweitzer-Mauduit International had to pay a one-time, non-cash tax expense of $40 million. Subsequent figures testify to the one-time nature of this drop.
Going forward, Schweitzer-Mauduit International is pursuing diversification away from tobacco-related sales and more towards special materials. In December 2013 it acquired metal and plastic component manufacturer DelStar Technologies from American Capital Strategies (ACAS). In 2015 it acquired TPU film and sheet manufacturer Argotec LLC for $280 million, and in 2017 it acquired Conwed Plastics LLC, a resin-based netting solution provider, for approximately $220 million. These three acquisitions, combined with two other "bolt-on" acquisitions made in the same period, comprise the advanced materials segment of Schweitzer-Mauduit International's operations. The profitability of these acquisitions is borne out by the revenue and net income figures reported above, and the 13.39% operating margin (trailing twelve months).
More acquisitions are likely going forward. Recently, the firm announced that two technical film converting businesses, Tekra and Trient, are in the process of being acquired. These pending acquisitions were addressed by CEO Jeffrey Kramer in the Q4 2019 earnings conference call:
We are excited to add these new converting capabilities to AMS as we will significantly expand the value-added solution set we can offer customers while bolstering our presence in several existing markets and gaining access to a host of new customers and film technologies.
That shareholders are benefiting from this diversification strategy is borne out by the 12.27% return on equity (trailing twelve months) and by the sustained dividend record: Schweitzer-Mauduit has rewarded shareholders with consecutively rising dividends for eight years, and is likely to continue paying rising dividends in the years ahead with a payout ratio of 50.79% and free cash flow of $131.7 million.
Schweitzer-Mauduit International's balance sheet seems solid enough to sustain the dividend and cope with further acquisitions down the road, as long-term debt of $540.8 million is offset by a net worth of $596 million, and total current liabilities of $157.6 million are offset by total current assets of $427.5 million, cash-on-hand worth $103 million, and total accounts receivable of $143.2 million. However, despite the diversification strategy and its benefits going forward, earnings-per-share growth over the next five years is only projected to be 5.00%. Prospective investors will therefore require a discount to fair value before parking money here.
Schweitzer-Mauduit International currently trades in the mid-$30 range. Chart generated by FinViz.
As of close of market on 03/02/2020, Schweitzer-Mauduit International is trading at a share price of $34.63 with a price-to-earnings ratio of 14.43 with a dividend yield of 5.08%, based on earnings-per-share (trailing twelve months) of $2.40. The current P/E is lower than the five-year average P/E of 16.67, and the current dividend yield is higher than the five-year average dividend yield of 4.36%. This suggests that Schweitzer-Mauduit International is currently trading below fair value, but what is fair value here?
To determine fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 0.96 (14.43 / 15 = 0.96) and divide the current share price by this valuation ratio to get a first estimate for fair value of $36.07 (34.63 / 0.96 = 36.07). Then I will divide the current P/E by the five-year average P/E to get a valuation ratio of 0.87 (14.43 / 16.67 = 0.87) and divide the current share price by this valuation ratio to get a second estimate for fair value of $39.81 (34.63 / 0.87 = 39.81).
Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 0.86 (4.36 / 5.08 = 0.86) and divide the current share price by this valuation ratio to get a third estimate for fair value of $40.27 (34.63 / 0.86 = 40.27). Finally, I will average out these three estimates to get a final estimate for fair value of $38.72 (36.07 + 39.81 + 40.27 / 3 = 38.72). On the basis of this estimate, the stock is undervalued by 12% at present.
Despite the low growth forecast, Schweitzer-Mauduit International looks like a solid pick for exposure to the profitable special materials sector, owing to its successful diversification strategy, above-average balance sheet, and sustainable dividend, which is especially attractive with a 5.08% yield. The stock is presently a buy.