Monday, September 1, 2008

* Stock Analysis: Avery Dennison (AVY)

This article originally appeared on The DIV-Net August 25, 2008.

Linked here is a PDF copy of my detailed analysis of Avery Dennison (AVY). Below are some highlights from the above linked analysis:

Company Description: Avery Dennison Corp. is a leading worldwide manufacturer of pressure-sensitive adhesives and materials, office products, labels, retail systems and specialty chemicals.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
AVY is trading at a discount to 1.) and 3.) above. Since AVY's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, AVY is trading at a 29.2% premium. AVY had a Star deducted for trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
AVY earned one Star in this section for 3.) above. AVY has paid a cash dividend to shareholders every year since 1919 and has increased its dividend payments for 29 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
AVY earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in AVY you would earn $1,387 less than a MMA earning a 20-year average rate of 4.61%. If AVY grows its dividend at 1.9% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: AVY is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. AVY is the market leader in pressure-sensitive adhesives and office products. It has enjoyed above-average growth rates in key end-markets and a relatively strong balance sheet. labels. In 2007 AVY acquired Paxar, a major competitor in the product identification industry. AVY should see significant cost savings over the next few years.

Conclusion: AVY lost one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of negative one Star. Since my scale bottoms out at zero, this quantitatively ranks AVY as a 0 Star-Avoid stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $31.03 before AVY's NPV MMA Diff. increases to the $3,000 NPV MMA Diff. I like to see. At that price AVY would yield 5.28%. At 1.9%, AVY's dividend growth rate is anemic. If AVY were to grow its dividend at 7.6% it would reach the desired $3,000 NPV MMA Diff. at the current yield. AVY will not be invited to join my income portfolio anytime soon.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I did not own shares of AVY (0.0% of my Income Portfolio).

What are your thoughts on AVY?

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