Packaging Corporation Of America A Good Buy For Income Investors

Packaging Corporation Of America Cashes In On eCommerce 

While Packaging Corporation Of America (NYSE: PKG) didn’t come right out and say it, the trends in eCommerce are helping to drive this business to new highs. And we are not surprised. eCommerce was growing at a double-digit clip before the pandemic and has only accelerated in the time since. And that means boxes, lots and lots of boxes, but there is more to the story. While the pandemic spurred the use of boxes it cut down on the use of paper. Our society is more digitized than ever and using less and less paper every day. This is why Packaging Corporation Of America’s decision to re-configure one of its plants to cardboard was such a good one. And why the Q1 results are so good. 

Packaging Corporation Of America Blows Past The Consensus 

Packaging Corporation of American blew past its consensus targets and that is saying something. There hasn’t been much activity in the analyst’s community over the past month or so but nearly every analyst covering the stock issued an upgrade, price target increase, or update in the wake of the last report. That said, the $1.81 billion in revenue is up 5.8% from last year and that is a relatively difficult comp that also beat the consensus by 500 basis points. The prior year’s Q1 saw revenue fall about 1.4% but that decline was consistent with business conditions and not influenced by COVID. 

The gains were driven by a 6.6% increase in the Packaging segment that was offset by minor weakness in the paper segment. Packaging sales were driven by an increase in volume coupled with a favorable price/mix. The price/mix was bolstered by strategic price increases that are slated to continue in the coming quarters. 

Packaging sales were impacted by timing as well, there was one less day in the 2021 period which, when adjusted for, puts daily sales at up 8.8%. Packaging sales were also aided by the reconfiguring of a mill to cardboard and that reconfiguration is fast becoming permanent. Looking forward, we can expect the packaging segment to continue working at or near full capacity for some time to come. Inventory of corrugated cardboard is at a record seasonal low with volume demand only expected to rise into the end of the year. 

Moving down, the increase in volume led to a substantial amount of cost-leveraging that was only partially offset by higher freight and logistics costs. On the bottom line, the GAAP EPS grew $0.26 from last year to $1.75 and beat the consensus by $0.30. On an adjusted basis, the $1.77 increased by $0.27 or 18% to beat the consensus by $0.32. 

Packaging Corporation Of America Is A High-Yield Dividend Grower 

Packaging Corporation of America is a high-yield dividend payer and one with a positive outlook for dividend growth. The stock yields nearly 3.0% and the company is only paying out 56% of its earnings. The company also has a reasonably strong balance sheet and a history of intermittent dividend increases so there is precedent. The most recent increase came late in fiscal 2020 and was worth a cool 27% to shareholders. If revenue growth continues to grow sequentially like we think it will, there could be another double-digit increase towards the end of fiscal 2021 as well. 

The Technical Outlook: Packaging Corporation Of America Is Ready To Move Higher 

Shares of PKG opened the session with a little bit of weakness but yield-hungry investors quickly drove the price back up. Now it looks like the price action is ready to move up and retest the recent highs and break out to a new all-time high. The indicators are consistent with this outlook and show increasing strength in both the MACD and stochastic. Assuming price does break out to a new high we see this stock moving up $170 in the near term and possibly as high as $250 within the next 12 to 24 months.