Sonoco Packs Profits

South Carolina-based Sonoco Products (NYSE:SON) shows how companies in boring industries can be exciting for investors. Its business might not be the most thrilling -- the packaging firm manufactures cardboard canisters housing stacks of Procter & Gamble's (NYSE:PG) Pringles, foil baggies containing Del Monte's (NYSE:DLM) Star Kist tuna, and cellophane bags holding row upon row of Kraft Foods' (NYSE:KFT) Oreos, plus analogous packaging for nearly every other product under the sun (pardon the pun). But the numbers Sonoco racked up in its second quarter certainly are eye-opening.

Revenues in this ordinarily slow-growth business rose 11.7%. Earnings from continuing operations increased 32% and overall net earnings skyrocketed to 45.8%. All that, and the company pays a dividend, too (3.4%).

This kind of combination of growth and income is exactly what total return investors look for in a company, which is perhaps the reason Foolish dividend-hunter Mathew Emmert chose it for his lead selection in the June 2004 issue of Motley Fool Income Investor.

Peering into the future, Sonoco predicted that for the full year 2004, its earnings would come in a bit higher than previously expected, at $1.50 to $1.55 per diluted share, excluding the continued "one-time" expenses for restructuring. If accurate, those kinds of earnings would give Sonoco a forward P/E ratio of just 16.5.

So far, so good. But even the sturdiest packaging can sometimes develop a tear that requires fixing. For Sonoco, something appears to have happened in Q2 2004 that created a considerable leak of free cash flow from the corporate cashbox. In comparison to the year-ago quarter, cash from operations declined 28% to just $31.5 million. Simultaneously, the company entered into an acquisition of privately held CorrFlex Graphics, LLC. Between the $250 million purchase price, $28.6 million in capital expenditures, and payment of its regular quarterly dividend of $21.5 million, Sonoco was forced to take on additional debt, reversing (temporarily, one hopes) its previous trend of paying down its long-term debt.

Now, one quarter should not define a business. But the decline in free cash flow looks pretty significant to this Fool. Sonoco bears watching over future quarters, to determine if this is a trend in the making, or a mere hiccup in the company's history of strong free cash flow generation.

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Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.