R.R. Donnelley’s 8% Dividend Yield: Profit's Elusive, But Cash Flow’s Strong
As investors, we’re all increasingly accustomed to modern companies – created in recent years to capitalize on things like the Internet, global trade and the use of myriad technologies that replace much of what workers formerly did. So, Google (GOOG), bringing in about $38 billion in revenue last year with just 32,467 workers – that’s more than $1 million in revenue per employee – is no big shakes. In fact, some investors are restive because Google’s revenue isn’t growing faster than it is.
But most of the 5,000 or so publicly traded companies we offer data on at YCharts aren’t new – they’ve been around for decades and many have the aches and pains of old age. Sure, some like International Business Machines (IBM) reinvent themselves and seem only to get stronger.
But for every IBM, there are dozens of companies like R.R. Donnelley & Sons (RRD). It calls out to investors these days because Donnelley’s dividend yield is an incredible 8%. With interest-bearing investments paying next to nothing, people are searching for yield. And while a 4% or 5% dividend yield seems great, who wouldn’t like to throw an 8%-payer into their portfolio?
And, in fact, Donnelley might be just fine for some investors. It has strong cash flow, great customer relationships and is an active acquirer of smaller companies to continually add to its business. Oh, that business is printing – magazines, advertising circulars, books and directories, just about anything that combines paper and ink. Definitely not a modern business – Donnelley employs about 58,000 and had 2011 revenue of 10.6 billion, or less than $200,000 per worker.
Google may seem very modern today, but give it a few decades – and let it be on the losing end of some transformative changes in technology – and its finances could easily resemble those of Donnelley. The printer – sadly, in its 10-K, Donnelley avoids using the word “printing” until about 70 words into company overview – has lost money four out of the last five years, largely because of giant charges to write off assets, send workers packing and reduce the carrying value of once valuable businesses. Its sales are flat-to-down, even as it acquires other printers, because many business lines are shrinking.
And each day that people in the U.S. and abroad – about three quarters of Donnelley sales are stateside – become more comfortable with reading and advertising on digital media, Donnelley’s 60,000 customers themselves shrink and need less printing done. One could say investors have taken note:
Other old-company ills are apparent. Donnelley suspended its pension plan recently, but remains responsible for the fund, which is $1.1 billion underfunded. Separate retirement benefit plans are about $230 million underfunded. Donnelley has about $450 million cash and short-term investments, but it’s mostly parked overseas and the tax man would want his cut if the money was brought home. Cash flow is strong.
The question for management in such a fix is this: do we stick to printing and see if a combination of acquisitions, cost-cutting and prayer sees us through? Or should we change industries, redeploying our capital into something, well, more modern? Donnelley has decided to remain a printer. CreditSights, a debt and equity analysis firm, says overcapacity in the printing industry keeps 36% off the presses and printing plans idle.
And still, but for the charges to write down assets and lay off workers, Donnelley would be profitable. As printers go, it’s highly productive, modern even. CreditSights goes so far as to not condemn Donnelley’s plan to buy back $1 billion in shares, saying the company’s debt ratios should remain relatively constant. Donnelley has the cash to pay the dividend, even though it lacks the profits.
That 8% dividend you might want? It only costs about $200 million a year to fund. At $13 or so a share, one can expect to get $1.04 a year in dividends, unless and until things really go to hell.
Sounds like a lot of risk, but then 8% in this market is a ton of reward. Use the YCharts Screener to search for rich dividends, then comb through the individual company financials in the charts, then by all means read the gruesome 10-K filings. Chasing yield isn’t easy.