Packaging company Amcor has its problems. But the company's improving fortunes make its 5.5% dividend yield look increasingly attractive.
On Wednesday, Amcor, which makes packaging for a slew of consumer products from bottled water to pet food, reported better-than-expected fourth-quarter earnings and revenue. Adjusted earnings per share surged 23% to $1.23, beating Wall Street forecasts for $1.20 a share. Revenue rose 26% to $6.4 billion, above the average estimate for $6.01 billion.
Shares were down about 2% in early trading, but they have rallied sharply lately, gaining about 18% in the past three months.
The company continues to face headwinds, such as sluggish consumer demand, a spike in materials costs tied to the war in Iran, and its frustratingly slow recovery from the sales slump that occurred as consumer products companies worked off Covid-era packaging stockpiles.
Still, investors have been growing increasingly optimistic that the company's bet-the-farm move -- its $8.4 billion all-stock acquisition of packaging rival Berry Global last year -- could pay off. While Amcor has long been strong in flexible packaging, Berry focused on rigid containers.
The deal promised growth and cost savings, but also saddled Amcor with debt. In May, ratings agency Fitch reaffirmed Amcor's investment-grade bond rating, but warned that Amcor's current leverage ratio, which Fitch estimated at 3.6 times, would need to come down to the 2.5-to-3-times range. Amcor shares fell about 10% in the 12 months after the deal was announced in November 2024.
Now investors have more reasons to believe the transaction could pan out. Amcor has said the acquisition should lead to $650 million in total "synergies" over three years. About half of those are supposed to come from more efficient procurement, with the rest tied to administrative savings and new growth opportunities.
On Wednesday, Amcor said it was 10% ahead of its year-one estimate for $260 million worth of benefits, one of the factors that helped drive better-than-expected earnings.
Some on Wall Street are warming to the company's growth prospects. On Tuesday, UBS analyst Nathan Reilly initiated coverage of Amcor, issuing a Buy rating and a $56 price target, suggesting upside of about 20% from Wednesday's $47 price.
"Amcor has delivered subdued EPS growth over the past three years, as destocking and inflation-linked consumer pressure has weighed on volumes, " he wrote. "However, following the Amcor-Berry merger...we forecast a 3yr EPS CAGR of 9%."
To put that in context, Wall Street analysts expect consumer staples companies to grow profits by about 4% this year, on average.
Reilly also noted that Amcor raised its targets for growth and cost savings after its last major acquisition, of packaging company Bemis, in 2019. In addition, Reilly said that while the company has faced raw material inflation because of the war in the Middle East, it appears to have successfully passed those higher costs onto consumers.
Of course, with a yield of 5.5% -- the 11th highest in the S&P 500 -- it's natural for investors to wonder about the dividend.
In recent months, the company's payout ratio has looked uncomfortably high, with the dividend costing about $1.2 billion against free cash flow of $1.3 billion over the past year. But it's worth noting that the free cash flow figure includes about $290 million of Berry-related transaction and integration costs, which the company shouldn't have to face over the long term.
Amcor also gave investors another vote of confidence in the payout on Wednesday, hiking its quarterly dividend by 2% to 65 cents a share from 63.75 cents.
Given elevated debt levels following the Berry acquisition, the company has said paying down debt is a key priority. At the same time, it remains committed to "modestly growing the dividend," CEO Peter Konieczny said on the company's earnings call Wednesday.
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