Buy this dividend aristocrat for capital gains

CCL Industries may be a dividend aristocrat, but this global manufacturing stock is also a growth stock to buy for capital gains based on its rapid earnings-per-share growth.

dividend_aristocratWe regularly review Toronto-based CCL Industries (TSX—CCL.B). Since we published our March 3 issue, its shares have risen by 15.7 per cent. This gives them upwards price momentum and makes the shares more costly. Still, the MGI  (Marpep Growth Index) of 1.5 suggests they’re nicely undervalued.

The company is expected to earn record profits again this year and next. It has earned record profits each year since 2009, a difficult year. With its earnings rising, we expect this ‘dividend aristocrat’ to continue to raise its dividends each year. CCL remains a buy for further long-term share price gains and small but growing dividends.

Global manufacturing stock in 35 countries

CCL operates “154 production facilities in 35 countries on [all] 6 continents. . . . CCL is the world’s largest converter of pressure sensitive and extruded film materials for a wide range of decorative, instructional and functional applications for large global customers in the consumer packaging, healthcare and chemicals, consumer durable, electronic device and automotive markets. Extruded and laminated plastic tubes . . . and die-cut components, electronic displays and other complementary products and services are sold in parallel to specific end-use markets.”

In 2017, CCL’s earnings are expected to grow by 18.6 per cent, to $2.68 a share. Based on this estimate, the shares trade at a high price-to-earnings, or P/E, ratio of 23.3 times. Next year, CCL’s earnings are expected to grow by 11.2 per cent, to $2.98 a share. Based on this estimate, the shares trade at a better, but still hefty, P/E ratio of 21 times.

Most of CCL’s total returns of about 478 per cent these past years have come from share price gains. That largely reflects fast earnings per share growth. While the dividend has risen for many years, it yields only a small 0.74 per cent. As a result, the dividend is unlikely to attract investors seeking generous income.

Debt load is high but manageable

CCL’s net debt-to-cash-flow ratio stands at 3.9 times. That’s above our usual comfort zone of two times or less. Even so, we’re comfortable with this debt load for a couple of reasons.

First, CCL held cash of $519 million at the end of the first quarter. This greatly exceeds debt of $71.1 million due over the next 12 months. As a result, CCL has financial flexibility.

Second, we noted that CCL’s record earnings are growing. This should increase the company’s cash flow. A larger denominator, in turn, will reduce the ratio to better levels.

On July 6, a secondary offering of 5,000,000 Class B shares was completed. A firm owned by the controlling Lang family sold the shares at $66.65 each, for $333.25 million. CCL received no cash. The Lang family sold the shares for philanthropic and estate planning purposes. The family firm still owns 19.4 million Class B shares. More importantly, it controls CCL through the Class A voting shares.

The consensus recommendation of three analysts is ‘Buy’. We agree.

CCL Industries remains a growth stock to buy for further long-term share price gains and small but growing dividends.

This is an edited version of an article that was originally published for subscribers in the July 21, 2017, 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.
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