There is no exact definition for blue chip stocks. We define it as a stock with at least 10 consecutive years of dividend increases. We believe an established track record of annual dividend increases going back at least a decade, shows a company’s ability to generate steady growth and raise its dividend, even in a recession.

As a result, we feel that blue chip stocks are among the safest dividend stocks that investors can buy.

This installment of the 2022 Blue Chip Stocks in Focus series will analyze the packaging & containers company Sonoco Products Co (SON).

Business Overview

Sonoco Products provides packaging, industrial products, and supply chain services to its customers. The markets that use the company’s products include those in the appliances, electronics, beverage, construction, and food industries.

Sonoco was founded in Hartsville, South Carolina in 1899 and introduced the first paper textile cone. Sonoco Products is composed of 2 segments, Consumer Packaging, and Industrial Packaging, with all other businesses listed as “all other”.

Source: Investor Presentation

The Consumer Packaging segment is expected to generate 52% of projected 2022 revenue. Industrial Paper Packaging is expected to generate 38% of projected 2022 revenue, with All Other making up the remaining 10%.

Sonoco Products reported second-quarter earnings on July 21st, 2022. Revenues soared 38% to a record $1.91 billion. Adjusted earnings-per-share also grew considerably, from $0.84 in the prior year to $1.76.

The Consumer Packaging segment saw revenue grow nearly 66% year-over-year to $990 million, in large part due to the purchase of Ball Metalpack. Increased selling prices aided the company’s results. The Industrial Paper Packaging segment saw revenue grow 20% to $727 million, as a result of increased pricing.

Sonoco Products upgraded its outlook for 2022, and the company now expects adjusted earnings-per-share of $6.20 to $6.30 for the year, up from $5.25 to $5.45 previously.

We estimate that Sonoco Products can generate $6.25 in earnings-per-share for the full fiscal year 2022.

Growth Prospects

Sonoco is an established manufacturer and has grown earnings-per-share at a rate of 5.4% over the past ten years.

Sonoco Products has a set of strategic priorities for delivering growth over the intermediate term. Sonoco plans to simplify its business portfolio, resulting in fewer, but larger, businesses. The company is attempting to optimize its manufacturing footprint, resulting in operational and logistical efficiencies to add to the bottom line. The company has also put in place a plan to generate an additional $180 million in annual EBITDA by 2026 through self-help actions.

The corporation’s capital plan sees it allocating strategically to its highest return opportunities in its core. The current capital plan accounts for $325 million in high return on capital investments. These plans include $125 million for Project Horizon, $60 million in flexible packaging, $60 million in paper cans, and $10 million in food thermoforming. Project Horizon is the company’s plan to transform its corrugated medium machine in Hartsville, S.C. to an uncoated recycled paperboard operation, which will have annual production capacity of 180,000 tons.

And, where necessary, Sonoco will grow through acquisitions, which improve the portfolio and align with the company’s strategy.

We expect Sonoco Products will grow earnings-per-share at a rate of 5% annually in the intermediate term.

Competitive Advantages & Recession Performance

One important competitive advantage Sonoco Products’ possesses is pricing power as its products are in high demand. This pricing power enables the company to pass along rising raw material and transportation costs to their clients.

The company has also been wise in making strategic acquisitions, such as Ball Metalpack, Conitex, and Can Packaging.

The company is not immune to recessions, as earnings fell by 21% from 2008 to 2009. However, as soon as 2010, the company’s earnings surpassed that of 2008. Sonoco also faced a minor earnings dip in 2020 amid the coronavirus pandemic, but results bounced back in 2021 and are set to continue growing strongly.

Valuation & Expected Returns

Shares of Sonoco Products Co. have traded for an average price-to-earnings multiple of around 16.5. Shares are now trading below this average, which indicates that shares could be undervalued at the current 10.2 times earnings.

Our fair value estimate for Sonoco Products stock is 16.0 times earnings. If this proves correct, the stock will benefit from a 9.5% annualized gain in its returns through 2027.

Shares of Sonoco Products currently yield 3.1%, which is almost identical to its average yield of 3.2%. On a dividend yield basis, SON shares seem to be trading just below fair value.

The current dividend payout is adequately covered by earnings, with room to grow. Based on expected fiscal 2022 earnings, SON has a payout ratio of 31%. Sonoco has so far increased its dividend for 40 consecutive years. We anticipate continued mid-single-digit dividend increases in the years to come.

Putting it all together, the combination of valuation changes, EPS growth, and dividends produces total expected returns of 17.0% per year over the next five years. This makes Sonoco Products Co. a buy.

Final Thoughts

Sonoco is a leader in global packaging products, a sector where it has pricing power. The company is a Dividend Champion and has increased its dividend for 40 consecutive years.

Despite experiencing some earnings declines during hard economic times, the company remained profitable and rebounded swiftly. This profitability is part of the reason it has been able to grow its dividend through all sorts of economic environments.

With strong total return expectations of 17.0% per year over the next five years, Sonoco Products stock is a buy for long-term dividend growth investors.

More By This Author:

Blue Chip Stocks In Focus: Williams-Sonoma, Inc.
Blue Chip Stocks In Focus: Walgreens Boots Alliance
Blue Chip Stocks In Focus: Qualcomm