Hello and welcome to the third edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.

Today’s quality dividend stock recommendation is a company that pays generous dividends – and has been increasing them for the past 40 years. But first, let us delve into a short update on the macro and market developments, which will also help you evaluate the stock we will present next.

 

Macro & Markets: Bull Market or Not, Dividends Protect from Uncertainty

The S&P 500 (SPX) has officially entered a bull market, rising more than 20% from its October 2022 nadir. Celebrations aside, the main focus this week will be, of course, the Federal Reserve’s two-day policy meeting. Will the Fed pause for the first time in 15 months?

On the one hand, inflation is still high and isn’t coming down as fast as the policymakers would like it to. The latest Bloomberg survey partly blames corporate profits for the stickiness of the inflation: survey participants said that companies have been lifting prices in excess of their cost increases for the last two years; they believe the Fed should keep the rates higher for longer to combat the problem.

On the other hand, the economy is apparently on a downward trend: the rise in jobless claims, the weakening of the services sector, and the increase in corporate bankruptcies to their highest since 2010 point to a considerable economic weakening, if not yet to a recession. Still, the U.S. economy has again proven itself much more resilient than expected, given the fastest increase in interest rates in 40 years; it’s not unrealistic, then, to be optimistic about stocks, based on the economy’s strength.

It is that strength and resilience, though, that increases the risk of inflation becoming entrenched and self-perpetuating. If it does, keeping rates higher for longer might not be enough – the Federal Reserve might have no other choice than “to go full Volcker,” i.e., squash inflation by boosting rates quickly and keeping them high, even if it leads to a recession. This scenario is certainly not the base case, but a risk to the sanguine outlook popular with the stock markets at the moment.

So, even if the stocks are in a bull market, it doesn’t mean we are out of the woods. Whether the bull market has legs or not, we are still traversing one of the most unpredictable patches in stock market history. Stocks may continue their rally, or they may retest last year’s lows; trying to predict them is as impossible as ever. Thankfully, investors can count on another source of income apart from the share price appreciation that may or may not continue – dividends.

 

Quality Dividend Stock – This Week’s Top Pick

Without further ado, let’s dive straight into our recommendation for a quality dividend stock for this week.

Sonoco Products (SON) is a United States-based international provider of diversified consumer packaging, industrial products, protective packaging, and packaging supply chain services and the world’s largest producer of composite cans, tubes, and cores. The company operates through two segments: Consumer Packaging and Industrial Paper Packaging. Sonoco also offers various packaging materials, including plastic, paper, foam, and other specialty materials.

With more than 300 manufacturing and sales operations in 35 countries, Sonoco generates 65% of its revenues in the United States, with the rest coming from Europe, Canada, and many other places, as the company serves industrial and consumer customers in 85 countries. A pioneer in recycling programs, Sonoco uses recovered materials in the production of nearly all of its paper-based products.

Sonoco is a mid-cap company (with a market cap of $6.17B) belonging to the Materials Sector (Industry: Packaging and Containers). It was founded in 1899 as Southern Novelty Company and has been publicly traded on the NYSE since 1983.

SON is a financially healthy company, except for its recent increase in debt ratios (the debt-to-assets ratio rose from 64% to 71% last year). SON’s short-term assets exceed its short-term liabilities but don’t cover its long-term liabilities in full, although long-term assets exceed long-term debts by a wide margin. SON’s interest payments on its debt are well covered by its high EBIT.

The company has raised long-term debt in order to perform acquisitions aimed at speedy business and geographic expansion, and to meet its objective of average annual double-digit growth in earnings per share. Sonoco has acquired 18 companies, including four in the last five years. Last year, Sonoco made one of its biggest acquisitions, buying Ball Metalpack, a producer of sustainable metal packaging for food and household products and the largest manufacturer of aerosol products in North America. The acquisition paid off immediately, helping grow revenue by 30% last year.

Sonoco’s 12-month TTM Return on Equity (ROE) is high at 24.3%, versus the average for its industry, 19%. Its Return on Assets (ROA) of 9% is also higher than that of its industry (6.5%), as are its profit margins of 6.9% (versus the average for the industry of 6%).

In the past two quarters, the materials sector, and basically all sectors involved in physical production, have been under pressure, stemming from rising input and energy prices, as well as macroeconomic uncertainty. Thus, Q1 2023 results look a little weak, especially compared to 2022, which was a record year in the history of the company. In 2022, the company grew its sales by 30%, operating profit – by 63%, and EPS – by 65%. While in Q1 revenues declined year-on-year, the adjusted EPS came in at the upper end of the company’s guidance and beat estimates (as it did in each quarter since Q1 2020 with one exception). We estimate that the company can grow its earnings per share by at least 5% in the next five years. That may seem like too little as it is more than twice less than its growth in the previous five years, but we believe it’s best to hold a conservative outlook in the current unstable economic environment.

Following Q1 results, the company has increased its full-year 2023 outlook and raised its dividend – in the 40^th straight year of annual dividend increases. Sonoco’s dividend yield of 3.2% is twice that of the Packaging & Container Industry. With its reasonably low payout ratio of 32.9%, SON’s dividend payments are well covered by earnings, and there is plenty of capital left to reinvest into the business.

With a 120-year history of operations and a 44-year history of dividend increases, Sonoco is a great long-term income investment, with continued increases in dividend payments as good as certain. In addition, SON’s investors have benefited from the stock’s price appreciation. In the past three years, Sonoco’s shares rose 26%; in the past 12 months – 14%. True, this isn’t the triple-digit growth of some IT companies, but it’s quite high for a low-growth Materials stock. Based on Wall Street analysts offering 12-month price targets for Sonoco Products, SON is expected to add 6.1% in this period. However, if the company continues to perform as strongly as it did in recent years, the Bank of America Securities (BAC) outlook of a 27% upside might be the one to materialize.

After the company beat analysts’ estimates, raised its 2023 outlook, and increased dividends, it has been getting much more media attention than before. SON is now on the Hedge Funds’ radar, too, with Centerstone Investors LLC increasing their holdings in the company, and Gotham Asset Management LLC opening a new position. Blogger opinion of the company is very bullish, and the technical indicators are positive. The company’s executives have been purchasing its shares in recent months, a clear sign that the management believes Sonoco’s success will continue.

The low valuation compared to the sector adds to SON’s potential upside: its TTM P/E of 12.5 and Forward P/E of 11.2 are 11% and 18% lower, respectively, than the averages of the Materials sector. Besides, Sonoco also returns capital to its shareholders through various share buyback programs through the years; in the past 12 months, the company has repurchased shares in the amount of $10.6 million.

Sonoco is rated 8/10 (“Outperform”) by TipRanks’ Smart Score system with a “Moderate Buy” recommendation. We believe that the company demonstrates financial health, business advantages, respectable growth, and stability in returning capital to shareholders, while its attractive valuation leaves a lot of room for further price appreciation. It is well-positioned to continue to grow and expand, which will allow it to increase income for its investors.

 

• Category: Dividend