Avery Dennison Corporation (AVY) sells things that stick. Avery Dennison’s primary business is the production of pressure-sensitive materials and a variety of tickets, tags, labels and other products that are converted into labels. Avery Dennison also sells related non-pressure sensitive products such as fasteners, tickets, tags, radio-frequency identification (“RFID”) tags, imprinting equipment and related services to retailers, apparel manufacturers and brand owners.
Avery Dennison has three operating segments:
- Pressure-sensitive Materials (“PSM”) – accounted for 73% of 2013 sales and manufactures and sells various branded pressure-sensitive label and packaging materials, graphics and graphic films, reflective products, tapes, and performance polymers (largely used to manufacture pressure-sensitive materials)
- Retail Branding and Information Solutions (“RBIS”) – accounted for 26% of 2013 sales and designs, manufactures and sells a wide variety of branding and information solutions to various customers on a global basis.
- Other specialty converting businesses – accounts for less than 1% of 2013 sales and consists on Vanice, a business that manufactures an array of pressure-sensitive adhesive products sold primarily to companies within the healthcare industry.
Avery Dennison’s business is global in scale with 75% of sales accounted for internationally. Sales in the PSM segment are not highly seasonal, while the segment is highly seasonal with peaks in advance of the spring, fall and holiday shopping seasons.
AVY – Increasing Sales and Earnings
In Jan., Avery Dennison reported full year 2013 net sale growth of 5% to $6.14 billion with adjusted earnings per share of $2.68, up 37% from $1.96 in 2012. At the same time, for the fourth quarter of 2013 Avery Dennison reported earnings-per-share (“EPS”) of $0.69 beating Analyst consensus estimates of $0.67.
Continuing the momentum into the first quarter, Avery Dennison reported revenue increased 3% to $1.55 billion from $1.49 billion the prior year, but unfortunately missed Analyst estimates of $1.57 billion. Adjusted EPS also showed improvement, increasing 10% from last year to $0.65 per share, but also missed Analyst estimates. The PSM segment reported sales increases of 4% followed by Vanice that also had a 4% increase and finally the RBIS segment that had sales growth of only 1%.
In the second quarter, Avery Dennison reported sales growth of 4% to $1.62 billion driven by strong sales on the PSM segment of 6% and Vanice medical of 9%, offset by a decline of 1% in RBIS. Cost of sales increased 4.7%, squeezing gross margins, which shrank to 26.5%. earnings-per-share for the quarter were 80 cents per share, up 12.7% from 71 cents year over year.
AVY – Buying Opportunity Offers Great Dividend Yield
Second quarter results reflected a growing weakness in the retail market that increased uncertainty and led to an Analyst downgrade, driving Avery Dennison stock down in July. After regaining some ground in August, Avery Dennison stock continued a swift decline in September. AVY stock is down about 15% year-to-date while the S&P 500 has continued to move upwards.
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In the midst of the recession, Avery Dennison reported a negative $7.21 EPS in 2009, recovered in 2010 with earnings of $2.97 per share but even with continued stock buy backs, has a trailing twelve month EPS of only $2.07. Most analysts estimate that Avery Dennison will end the year in the $3.0 EPS range. I would expect Avery Dennison to see full-year revenue growth in the 4% range in 2014 and continued annual earnings per share increases thereafter.
After a dividend cut in 2009, 2010 dividends of 80 cents per share have increased to $1.22 on a trailing twelve-month basis, a growth of over 11%. Earnings are now catching up to dividend growth with a 54% payout ratio, down from 69% in 2011.
Avery Dennison has a price to earnings ratio of 18.8, below my threshold of 20 for a dividend stock and a yield of 3.3%, above my minimum yield of 3%, which I also like to see for dividend stocks. Analysts have a 12-month consensus, stock price estimate of $54 a share with a price to earnings growth ratio of 1.4, so I would not expect significant stock price appreciation in the short to mid-term.
Income investors should take the Sept. correction as a buying opportunity as Avery Dennison’s dividend yield has not pierced the 3% level since early 2013, making this a great buying opportunity in a company with dividend and earnings growth.
Avery Dennison should only be considered by battle tested dividend investors who are willing to take on a little more risk, as the company has cut its dividend in the recent past even though it had the capacity to pay it, and due to seasonality in the business there is volatility in earnings reports.
Earnings volatility has primarily been driven by the lack of significant barriers to entry in Avery Dennion’s largest business segment, PSM, which allows new entrants to easily enter the market if margins improve to the point where economic profits become possible. Avery Dennison’s second largest business unit, RBIS, should see continued improvement into 2015 as it is closely tied to the general state of the overall economy.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
