Sonoco

From yarn spindle to global packaging group

I can totally understand investors who want to feel a certain thrill when investing. When I dug deeper into the GameStop short squeeze story at the end of January, I couldn't hold back either and invested, or rather gambled, along with everyone else. First it shot up, then it went down just as fast, and I got stopped out with part of my shares at probably the worst possible moment. Shortly afterwards it went back up - experiencing that up close was really wild. I checked the prices every morning, and once it actually showed me a price of $25,413 (screenshot). For a brief moment I really thought I was about to make the profit of my life - unfortunately it was just a display error! I'm still going to sue Investing.com for that - just kidding ...

It was interesting to take part in something like that for once, but going forward I'll stay true to my boring stocks again. That's why today I'd like to introduce another candidate that fits into the "boring, but profitable" category. The Sonoco Products Company is a packaging company that operates around 320 plants worldwide and supplies many well-known brands with its products.

The history and business model of the Sonoco Products Company

The origin story of today's packaging group begins on January 3, 1837, when James Lide Coker was born near Society Hill (South Carolina). His father Caleb worked as a farmer and merchant at the time and taught him everything he needed to know from an early age. At the age of 20, James studied at Harvard University to prepare himself even better for managing agricultural estates. Afterwards, his father signed over a piece of land in Hartsville to him, where he could apply the agricultural science methods he had learned. During the Civil War he rose to the rank of major, but was seriously wounded in battle. His journey back was filled with terrible pain, and at home he found his homeland devastated and destroyed. James didn't let it get him down and began rebuilding. In 1865 he and his father opened a general store, which quickly flourished and made hefty profits. He invested this money not only in new ventures, but also in the area's infrastructure.

Among other things, he founded a cotton mill, a cottonseed oil mill and a small bank, had Hartsville connected to the rail network at his own expense, and provided electric street lights as early as the early 1890s. In 1889, together with his eldest son James Jr., he founded the Carolina Fiber Company, a mill for making pulp from pine wood. It took quite a while before the two of them perfected the production process. But then they had to realize that the pulp wasn't selling as hoped. Now they faced the decision of either closing the mill or investing more money to process the pulp further into paper. Major Coker decided to found the Southern Novelty Company together with his other son Charles. He rented a small warehouse, bought a paper press for just under $19,000 and used the pulp from the Carolina Fiber Company to make paper yarn cones, which he then used in his cotton businesses.

After just one year, the new company recorded revenue of $17,000 - after deducting all costs, a profit of $2,000 was left over. The textile industry developed superbly over the following years, and Coker's yarn spindles were in high demand, since they were much cheaper than the wooden spindles used before. The company kept expanding and pushing into new business areas. It quickly made a name for itself as a high-quality paper producer that caters perfectly to its customers' specific requirements. When it renamed itself the Sonoco Products Company in 1923, it crossed the million-dollar revenue mark for the first time. Not even the Great Depression could stop this growth - quite the opposite: the company used the opportunity to make its first acquisitions. To this day, a whole series of further acquisitions has followed, all of which have made Sonoco one of the largest packaging companies in the world today. It divides its business mainly into the segments Consumer Packaging and Industrial Paper Packaging, plus one segment for all other products and services.

How can the Sonoco Products Company's business develop in the future?

Before we get to that question, I'd like to briefly sum up the packaging company's business model again. Today, around 19,000 employees work for Sonoco at 320 locations spread across 34 countries. With its products and services, it serves customers from a wide variety of industries in around 85 countries, including some world-famous top brands. Sonoco generates annual revenue of around 5.2 billion US dollars. As already mentioned, it divides its business into three segments.

1. Consumer Packaging: This segment generated 45.9 percent of total revenue in the last fiscal year. It primarily serves the markets for ready-made meals and fresh food. Besides round and shaped rigid paper containers, it also makes metal cans with peel-off lids, plastic trays and printed flexible packaging.
2. Industrial Paper Packaging: This segment contributes 35.8 percent of total revenue. Here, Sonoco develops, produces and sells paper tubes, fiber-based protective packaging, wire and cable reels, and spools made of wood, metal and, of course, paper. This segment also includes its recovered paper and waste recycling division and its 23 paper mills.
3. All Other: This combined business segment most recently generated around 18.3 percent of annual revenue. It handles packaging for the healthcare industry as well as thermoformed rigid plastic trays, custom protective packaging made of molded foam, temperature-assured packaging, and other paper products.

Now let's take a look at the data from the most recently published quarter (Q2 2021 - ended July 4, 2021). Total revenue in this reporting season was $1.38 billion, about 11 percent above the result from the prior-year quarter. Due to an extraordinary pension settlement, early repayment of debt and higher restructuring costs, Sonoco had to report a net loss of $334 million, or $3.34 per share, in this quarter. Adjusted earnings per share ultimately came in at $0.84, compared to $0.79 in 2020.

In summary, you could say that the Sonoco Products Company has a promising future ahead of it. Products simply have to be packaged, whether you buy them in a store or from an online retailer. On top of that, e-commerce uses shipping-safe packaging material - and Sonoco is perfectly positioned here too. One topic the packaging group also gives a lot of thought to is sustainability. For this purpose, it operates more than 40 recycling facilities worldwide that not only process recovered paper for reuse, but also conserve resources and generate clean energy in the process. All in all, in my opinion these are the best possible conditions for a long-term investment.

What about the dividend?

Sonoco shareholders received their first profit share in the form of dividends as early as 1925. Since then, the company has paid a dividend every quarter. Since 1983, the packaging group has also managed to raise the dividend year after year. The average dividend growth rate over the last 10 years, however, is "only" 4.7 percent. On the other hand, the current dividend yield of 2.8 percent scores points. The Dividend Aristocrat's payout ratio is usually always between 50 and 60 percent - due to the current loss, it's logically above 100 percent.

Conclusion:
Over the years, the Sonoco Products Company has built a solid, future-proof business model and today ranks among the largest and most successful packaging companies in the world. Dividend investors should also get their money's worth with this stock in the long run, which is why I can only recommend taking a closer look at Sonoco.