CCL Industries’ shares aren’t cheap. But it rewards its shareholders by raising its dividends each year and buying back its shares. Buy for further long-term share price gains.
We regularly review Toronto-based manufacturing stock CCL Industries (TSX—CCL.B). Its shares have upwards price momentum, but this ‘conservative’ stock is not cheap.
CCL operates 191 production facilities in 42 countries. This geographical diversification improves the company’s safety by reducing its dependence on any one economy.
CCL has four business segments: CCL, Avery, Checkpoint and Innovia. CCL is “the world’s largest converter of pressure sensitive and specialty extruded film materials for a wide variety of decorative, instructional, functional and security applications for government institutions and large global customers in the consumer packaging, health care and chemicals, consumer electronic device and automotive markets.
CCL is well diversified
CCL “is partly backward integrated into materials science with capabilities in polymer extrusion, adhesive development, coating and lamination, surface engineering and metallurgy, deployed as needed across the four business segments”. The company’s diversification by product and customer further improves its safety. One risk, however, is that there’s a backlash against goods considered to be ‘overly packaged’.
In 2021, CCL earnings are expected to rise by 5.5 per cent, to $3.25 a share. Based upon this estimate, the shares trade at a hefty P/E (price-to-earnings) ratio of 21 times. In 2022, the company’s earnings are expected to go up by 5.8 per cent, to $3.44 a share. Based on this estimate, the shares trade at a better forward P/E ratio of less than 19.9 times. CCL’s price-to-cash-flow ratio is 13.5 times. That’s not particularly cheap either. But as CCL’s earnings and cash flow grow over the years, the shares are likely to continue to rise. The shares trade far above CCL’s book value of $18.38 a share.
CCL raises its dividend each year. It currently pays 84 cents a share, for a modest yield of 1.2 per cent. We believe that the dividend will keep on growing. For one thing, the company’s expected earnings per share greatly exceed the dividend. For another, its net debt-to-cash-flow ratio is 1.4 times. That’s within our usual comfort zone of two times or less, particularly since CCL generates diversified revenue and cash flow. Its modest debt gives it the means to maintain its dividend.
CCL buying back its shares
CCL also plans to reward its shareholders by buying back up to six million Class B shares. It can do so from May 25, 2021, until May 24, 2024. The company plans to cancel any shares that it repurchases. This will automatically raise the company’s earnings per share. Higher earnings per share, in turn, justify a higher share price. Management said: “Such purchases are an appropriate and desirable use of available funds.”
At the start of the second quarter, CCL Industries had cash of $667 million and an untouched credit facility of US$1.2 billion. President and chief executive officer Geoffrey T. Martin sees this cash as “leaving us well placed to fund global expansion initiatives”.
If you’re a patient shareholder seeking further long-term share price gains and growing dividends, buy CCL. Beat it by buying before it does.
This is an edited version of an article that was originally published for subscribers in the July 16, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846