of Amcor (New York Stock Exchange: AMCR) the stock price is currently trading at almost exactly the same level as a year ago despite a nice double-digit increase in the stock price throughout the year. The packaging giant is now dealing with the impact of inflation on its profits and although it has been able to maintain a relatively stable net profit, margins are shrinking as it takes some time before the price increases can absorb the impact of rising raw material costs.
Revenue is growing rapidly, but margins are shrinking
The company’s fiscal year ends in June, which means that the most recent results released by the company cover the first half of fiscal 2022, ending in December. Total revenue grew to exceed $6.9 billion in 2021, but as COGS grew at a faster rate, gross profit actually declined. While Amcor generated gross profit of $1.3 billion on revenue of $6.2 billion in 2020, gross profit was approximately $1.295 billion, or a gross margin of 18 .7%. That still looks good, but it’s a noticeable decrease from gross margin in the first half of fiscal 2021.
The situation was a little worse in the second quarter with a gross margin of only 18.40%, but Amcor also saw a reduction in its SG&A expenses and restructuring expenses and these elements helped Amcor report a slight increase in the result of operating in the second quarter as well as the first half of 2021. Net interest expense is also declining and Amcor reported net income attributable to Amcor shareholders of $427 million, or $0.28 per share. This is a slight increase compared to the same period last year, but it is clear that the improvement was mainly fueled by a decrease in restructuring expenses.
Fortunately, Amcor’s capital expenditures tend to be lower than depreciation expenditures, which generally raises the free cash flow result to a level above reported net income.
In the first half of fiscal 2022, Amcor reported operating cash flow of $323 million, but that includes a $525 million investment in working capital and excludes $2 million in lease payments. . On an adjusted basis, operating cash flow in the first half was approximately $846 million. And with a total investment of $255 million, the underlying free cash flow result was $591 million.
That’s higher than reported net income thanks to the $80 million difference between depreciation expense and actual capital requirement. Additionally, the income statement also included $31 million of non-cash stock-based compensation.
What does this mean for the dividend?
Amcor currently pays a quarterly dividend of $0.12 per share, which translates to a current dividend yield of approximately 4.4%. It’s very attractive and the dividend yield is fully covered by both earnings and the underlying free cash flow. Based on the current number of shares, total free cash flow per share in the first half of the current fiscal year was approximately $0.39, which means the payout ratio is just over 6 %.
Amcor also continues to repurchase its own shares and over the past six months the company has spent more than $400 million to repurchase and cancel its own shares. During the first half of the financial year, the company repurchased 25 million of its own shares while the Treasury bought an additional 11 million shares to compensate for the exercise of stock options.
This means that the current net number of shares has fallen from 1.56 billion shares at the end of June 2020 to only 1.51 billion shares at present, Amcor having repurchased 4% of its number of shares. This reduces the need for cash to cover its dividend (the quarterly dividend now costs the company just over $180 million per quarter) and the ongoing buyback and cancellation plan will allow Amcor to increase its quarterly dividend without see its cash outflows increase.
So while Amcor doesn’t look cheap given the EPS performance, revenue-focused shareholders shouldn’t worry about the dividend as it’s still largely covered by both earnings and cash flow. available. Amcor is using its excess free cash flow to buy back its shares, which will further improve the dividend coverage ratio.
I currently don’t have a long position in Amcor but I am watching option premiums to take advantage of higher levels of volatility while waiting for Amcor to pass on its higher operating costs to its customers.