Commercial printing company R.R. Donnelley (RRD) may be seen as the big fish in a shrinking pond. As the world goes more and more digital, the printing and paper products that have been the company's primary business are not as widely ordered and used. RR Donnelley appears to the uninformed investor as the exact opposite of a modern tech company. These reasons may be why the market has recently pushed the RRD share price down toward the 52-week low while pushing the dividend yield to over 9%. There are several compelling reasons why this stock may be undervalued, selling at a price of $11.50 per share at the time of writing.
RR Donnelley provides printing services to a full range of business customers. Recent new contract signings include Chrysler, IMG, American Media, Inc. and Herbalife (HLF). Printed products include catalogs, magazines, user manuals and financial reports. The company counts every one of the Fortune 100 companies and 88 percent of the Fortune 1000 companies as customers.
To cope with a future where printed materials are replaced by digital files, R.R. Donnelley has a two-pronged strategy. As the dominant company in a sector filled with smaller, niche companies, R.R. Donnelley is very active in the acquisition of smaller businesses in the sector. In 2011, the company announced eight acquisitions. The most recent was the purchase of LibreDigital, a provider of e-book content. A major addition occurred in late 2010 when the acquisition of Browne & Co. was finalized. Browne was a major provider of corporate shareholder and marketing communications services. All corporations are required to generate a large amount of information for shareholders and the oversight agencies, making this a very lucrative addition to the business portfolio.
The other focus for maintaining and growing revenue and profits is to transition to a wider range of digital services and products. Many of the acquisitions made by R.R. Donnelley are geared toward offering digital as well as print services for the existing product lines. Adding product lines and services allows Donnelley to be a one-stop shop, where everything is available for print and digital printing when compared with smaller competitors like VistaPrint (VPRT) and Multi-Color Corporation (LABL), which have more limited offerings.
The current dividend rate from Donnelley is 26 cents quarterly. The company has been paying at this rate since the second quarter of 2003, when the payout was increased by a penny. Investors should not expect a dividend increase any time in the near future. On the other hand, there is little reason to anticipate a dividend cut. Non-GAAP income per share was $1.79 in 2010, projected to be $1.80 for 2011 and the earnings estimate for 2012 is $1.74 per share. This is not the type of earnings path an investor wants to see for a growth stock, but the current and expected earnings amounts adequately cover the $1.04 per year dividend.
For 2011, R.R. Donnelley will generate $650 million in free cash flow after capital expenditures. The annual dividend payments total about $200 million. A share repurchase authorization has reduced the number of outstanding shares by 10 percent over the last year. With the current share price at about half the value when the $1 billion buyback was authorized, the share count could decline even faster in 2012. This would increase the net income per share and improve the dividend coverage based on both net income and free cash flow.
The Donnelley share price fell off the $20 cliff to the low teens in July of 2011, when the overall market had a pretty severe correction with the broader market averages dropping by about 15%. The indexes recovered most of the decline by the end of the year, but the share value of R.R. Donnelley stayed down. Then in January, several analysts hit R.R. Donnelley with target price reductions and the share price dropped to the recent 52-week low. So the Wall Street target prices drop from the high teens to the $16 to $17 range and the stock price drops to $11.50 - go figure.
The bottom line is the R.R. Donnelley share value is not going to decline to the point where this stock yields 10 percent. With a couple of decent quarterly earnings reports the share value will be back into the mid-teens. If management has been spending that billion dollar share authorization on $11 to $12 shares, the stock could be close to $20 by the end of the year, based on the per share income gain due to a much lower share count.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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