Is Rexam a Buy?

LONDON -- I strongly believe that consumer-packaging specialist Rexam (LSE: REX  ) offers solid potential for investors seeking undervalued stocks. Demand for the firm's drinks cans appears to have turned the corner and once again driven earnings growth, while a dependable dividend record provides peace of mind for income investors.

A canny choice
Rexam noted in November's interims that global volume within its beverage cans arm rose 6% in the July to-September period. Although sales in Europe dipped, the demand recovery in North America for its standard cans drove performance. Particularly satisfying was its operational improvement in emerging markets, with Russia returning to growth and turnover in South America accelerating.

The company is committed to international expansion to drive the top line. Recent moves include the addition of an aluminum can manufacturing line in India, boosting output to 950 million beer cans per annum, and a new factory in Finland to profit from a structural shift from bottles to cans.

With beverage cans responsible for about 90% of Rexam's turnover, the division's progress should vastly offset a third-quarter downturn in Rexam's health care business owing to a contract loss. And meaty volume growth should continue to drive the top line; Barclays Capital expects turnover to rise 5.3% in 2013 to 4.1 billion pounds.

Following a projected earnings-per-share fall of 3% to 35.2 pence in 2012, Rexam is expected to return to positive advances this year with a solid 12% rise to 39.3 pence. A further 9% jump to 42.8 pence is penciled in for 2014, analysts say.

Plump payouts
Rexam claims it is committed to delivering shareholder value. It divested its cosmetics, toiletries, and household care products division at the end of last year, concluding the sale of its personal-care business for a total of 439 million pounds following the August sale of its High Barrier Food arm.

Following the disposals, the company signed off a cash return of roughly 45 pence per ordinary share at January's general meeting, equating to an aggregate 395 million pound payout. Rexam has a solid record of delivering healthy payouts to investors even during times of earnings-growth pressure, and healthy dividend growth is projected for the medium term. According to City estimates, a dividend of 3.4% for last year is set to rise to 3.8% in 2013 before increasing to 4.2% in 2014.

I believe the firm's projected earnings turnaround, allied to its chunky payout history, emboldens Rexam's position as a great value stock. A P/E ratio of 13 for 2012 is forecast to fall to 11.6 this year and to 10.7 in 2014.

Reap the dividends
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