The global packaging industry is forecast to grow at a compounded annual growth rate, or CAGR, of 3.5% through 2020 -- a decent hurdle for ambitious packaging corporations setting their annual revenue targets for the next three years. While aggregate packaging sales are set to hit nearly $1 trillion by 2020, not every company in this notoriously volatile industry will be able to capitalize on market opportunity. Dividend-oriented investors should consider buying into three industry leaders, each of which specializes in a different area of the sprawling packaging market: Packaging Corp of America (PKG 3.78%), Sealed Air Corporation (SEE 0.14%), and Avery Dennison (AVY 2.10%).
Each of these organizations should provide ongoing earnings and dividend growth. And they've performed exceedingly well for companies that have reinvested their dividends in the near past:
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Corrugated board galore
Packaging Corp of America is the country's fourth-largest producer of containerboard products and the third largest "freesheet" (i.e. cut papers) producer. The company manufactures both linerboard and corrugating medium, the two types of paper from which corrugated board is made. "PKG" sells a plethora of packaging types used in shipping and display, including conventional container packaging, colorful retail-display boxes, and packaging for beverages, meat, fruit, and vegetables.
After its 2013 acquisition of Boise Paper, which pushed total annual revenue from $3.6 billion to $5.7 billion, the company's top line has remained flat over the last three years. But Packaging Corp has boosted profit margins in the same period by proactively shutting down underperforming mills.
To kick-start revenue, the organization has set out again on the acquisition trail. Last year, Packaging Corp acquired two corrugated-cardboard companies: Tim-Bar Corporation and Columbus Container. These two purchases are positively impacting results: Through the first six months of 2017, revenue is up 10.7% and net income has increased more than 18%.
Packaging Corp has provided annual dividend increases since 2011. Its current quarterly dividend of $0.63 yields 2.4% on an annualized basis. Even better, the dividend has doubled since 2013. And quarterly checks to shareholders aren't "boxed in" -- the company's payout ratio of 49.80% indicates room for future increases.
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Hi-tech food packaging
Charlotte, North Carolina-based Sealed Air Corporation specializes in the design and manufacture of advanced food safety and security packaging, as well as facility hygiene technologies. The company recorded net sales of $6.8 billion in 2016 and net income of $486.4 million. Similar to Packaging Corp of America, Sealed Air has reported a soft top line over the last three years, with revenue declining 12.5% between 2014 and 2016. But also like its packaging peer, Sealed Air has improved operations over the same period -- 2016's net income represented an improvement of 88% over 2014.
Sealed Air raised its dividend for the first time in several years in 2016, advancing the quarterly payout from $0.13 to $0.16, which brings current yield to 1.4%. "SEE" sports an attractive payout ratio of 35.2%. The company's payout is likely to rise again soon, as Sealed Air announced in March that it would sell its industrial hygiene and facility-cleaning segment "Diversey" to private equity firm Bain Capital for $3.2 billion. Management has indicated that, in addition to paying down debt and investing in future acquisitions, some of the proceeds of the sale will be used for share repurchases and future dividend hikes.
A packaging company that doesn't mind being labeled
With revenue of $6.1 billion in 2016, Avery Dennison is roughly the same size as Packaging Corp and Sealed Air -- although Sealed Air's revenue will drop in 2017 upon the sale of its Diversey segment. Avery Dennison is a specialist in the materials associated with packaging: labels, tickets, tags, and pressure-sensitive materials used by printers for processes like embossing and die cutting. The company also manufactures radio-frequency identification (RFID) tags and other labels and fasteners, which it sells to the retail industry.
To spur growth beyond the packaging-industry rate, Avery Dennison has engaged in small, but significant, tuck-in acquisitions in the last few years. Last year, the company acquired the European operations of pressure-sensitive materials-manufacturer Mactac for $220 million. So far in 2017, it's snapped up Israeli specialty-films manufacturer Hanita Coatings for $75 million, Chinese industrial tapes business Yongle Tape Company for $190 million, and tiny Irish wound-care manufacturer Finesse for an as yet undisclosed amount.
Avery Dennison's M&A strategy is helping it maintain healthy revenue expansion. In the first half of 2017, revenue has grown by 5.7%, to $3.2 billion. As for dividends, the company has increased its quarterly checks to shareholders in each of the last six years. The most recent bump of 10% brings the current quarterly payout to $0.45 per share, good for an annualized yield of nearly 2%. A fairly efficient payout ratio of 43% enhances this dividend's attractiveness.
Look for Avery Dennison, like Packaging Corp and Sealed Air, to continue to improve profits and cash flow going forward, and reward patient shareholders with appreciable total returns.
