Richards Packaging Income Fund is a packaging company that has generated an average compounded annual return of 20.6% for the past 16 years. It manufactures and distributes packaging and related products in Canada and the US. It serves approximately regional cosmetic, healthcare, food, beverage, and other companies. The company was founded in 1912 and is headquartered in Mississauga, Canada.
A Long-Term Track Record of Predictable Growth
Let's start with the annual share price + dividend returns. As stated above, it has generated an average compounded annual return of 20.6% for the past 16 years (as far back as the chart goes). Below is a chart of RPI.UN (in red) long-term performance compared to the S&P 500 (in blue).
Besides the amazing returns, let's talk about the company's fundamentals. The company is free-cash flow positive and pays a monthly dividend. In its most recent quarter, RPI.UN saw a big increase in demand for their services due to the coronavirus because they are in the business of healthcare packaging as well. Their revenue also increased because of a rising US dollar compared to CAD, which was also attributed to the recent stock market crash. We do not believe that COVID-19 will last forever, therefore we made adjustments in our valuation calculations that will see their sales/income/free-cash flow come down a bit in the near future and eventually continue to go up with time.
5-Year Quarterly Free-Cash Flow Forecast
Below is our projection of the next 5 years of free-cash flow for the company. We used 8 years of free-cash flow data to make this projection. We believe that the upper orange line is the likely trajectory over the next 5 years, therefore, that is what we used to do our free-cash flow valuation.
Although the company has predictable and growing free-cash flows, when computing the numbers (using a 10% discount rate), we arrive at a fair value of about 340 million for their market cap. Their current market cap is 730 Million, which makes them quite over valued based off free-cash flow valuation.
A Monthly Dividend Stock, but is the Dividend Worth it?
Richard's Packaging pays an annual dividend of $1.32 cents per share. This is currently a 2.03% yield. Over the past 10 years, the dividend has been growing by about 5.25% a year on average. The dividend is definitely sustainable based off of our calculations but if using a required rate of return of 10% a year for this stock (which we recommend) with a dividend growth of 5.25%, this would make the fair value of the stock $16.39 a share. Therefore, if buying solely for the dividends, this stock is over valued here as well.
Balance Sheet & Health of the Company
Current Ratio: 1.7
The company currently only has 13 million dollars in debt, with over 56 million in equity if you don't include goodwill as an asset (useless asset in our opinion). This means they are not over-leveraged and are in a good position to maintain low debt to equity levels due to their free-cash flow generation.
Quick Comparison To Peers
P/E ratio: RPI.UN is in line with the industry average. Its P/E is 22.48 compared to the industry average of 22.43.
P/B ratio: RPI.UN is overvalued compared to its peers using a P/B ratio. Its P/B is 5.18 vs the industry average 2.79.
Richard's Packaging Income Fund is definitely a great company that has been growing predictably, has generated great returns, and has benefited from the pandemic. We believe the packaging industry is a safe and resilient industry over the long-term. If you value a long-term track record of share price appreciation and don't mind over paying for a solid company that is not negatively affected by the pandemic, then this stock is for you. If you are value conscious, this stock seems to be quite overvalued and it may be better to buy it at a lower price.
Follow us on twitter! @StockBrosTrades