Bemis Company Dividend – Slowing Or Growing?

By Chad Henage - June 21, 2012 | Tickers: AVY, BMS | 0 Comments

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Bemis Company (NYSE: BMS) reminds me of the type of stock that Peter Lynch would have loved. He said he preferred companies in low-growth industries that were boring. Bemis essentially is in the business of producing and selling film, bags, pressure sealants, and the like. This is not the type of business that keeps entrepreneurs up at night trying to come up with a new product to make millions. The good news is Bemis is very profitable doing this boring job. This profitability has led Bemis to its current standing as one of the few dividend aristocrats left. With over 25 years of dividend increases, can Bemis keep up this streak?

Although the business that Bemis operates in isn't exactly exciting, there is competition, Avery Dennison Corp. (NYSE: AVY) being one of the more prominent. Whether it's labels for bottles, envelopes, mailers or other products, nearly everyone has touched a product of one of these two companies. Given they are in the same industry, it makes sense to see how the two are valued. Look at the two side by side:

You can see the market respects both companies as they both sell for a multiple above their expected growth rates. Either company offers a yield over 3%, and they generate nearly the same amount of free cash flow from their assets base. It seems based on this that Bemis is fairly valued. Now the next question is, can the company afford their current dividend?

The best way to determine the affordability of a current dividend is to look at the company's free cash flow. In theory, if the company's payout ratio is low based on free cash flow, the dividend should be safe. Bemis' free cash flow payout ratio has ranged from as low as 25% to as high as nearly 40%. Most investors would say a payout ratio of less than 50% is very safe. Bemis' dividend appears safe at this point, but what about dividend growth?

The company has a history of increasing its dividend for over 25 years. However, if you look at the most recent several years, there is a clear pattern:

Given that analysts expect earnings to increase by 7.42% in the next few years, I would suggest dividend increases of 4-7% are likely. Though the company's payout ratio is fairly low, Bemis' cash flow has not followed earnings growth of the last few years. If this trend continues, dividend increases of greater than earnings growth would cause the company's payout ratio to rise. Bemis' yield is fairly attractive at these levels, but this 4-7% dividend growth isn't the 9% growth the company had a few years ago. If investors expect large dividend increases, they may be disappointed.

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