Dear Mr. Berko:
In January 2013, I had a $2,050 cash balance in my individual retirement account from a preferred stock that was partially called away. So I bought 200 shares of RR Donnelley at $8.75 because I used to work for that company in Chicago when I was in high school in the 1960s, because I myself am in the printing business and because the stock paid a $1.04 dividend that yielded almost 12 percent. It has now doubled, and I am thinking of buying 300 shares for our joint account with the money from a $5,000 certificate of deposit that comes due next week. Now the stock pays a 6.9 percent yield. Would you advise this? Could it double again, and is the dividend safe?
— WP, Joliet, Ill.
Dear WP:
R.R. Donnelley & Sons Co. (RRD-$15), founded in 1864, developed and printed the Chicago City Directory, the first formal listing of companies and their addresses in the country, which evolved into what is known today as the telephone directory. This $11.6 billion-revenue company — the largest commercial printer in the world, with over 60,000 customers — prints and binds most of the nation’s publications, including Time, Newsweek, TV Guide, Bibles, school books, phone directories, catalogs, retail inserts and manuals. And most food, health and beauty products, beverages and packaged products have labels that are Donnelley-printed, as are most office forms and financial documents.
However, because of Internet innovations and a generally poor advertising environment, most of RRD’s “ink-on-paper” business has been in secular decline. Still, during the past decade, RRD has engineered over 18 acquisitions — names such as Banta, EDGAR Online, Consolidated Graphics, OfficeTiger, Wallace Moore, etc. — bringing in nearly $2.3 billion of new revenue. If it can be printed with ink on paper, RR Donnelley will do it better.
CEO Thomas “TJ” Quinlan III owns 1.3 million shares of RRD and has put his money where he keeps his teeth. He realizes that the ink-on-paper business has about as much growth potential as the nation’s landline phone business. But TJ intends to diversify RRD beyond IOP printing revenues, which were 70 percent of revenues 10 years ago, and is moving RRD toward the emerging new field of printed electronics. This is a relatively new technology in which printers use layers upon layers upon layers of electrically conductive inks to produce a precisely determined thickness. RRD’s first product, antennas for passive radio-frequency identification and near field communication tags (this is a $9 billion market), went into production early this year. These tags, containing blank microchips, are embedded in credit card-sized packing labels that can be stuffed with data and read by smartphones and other short-range wireless products. RRD is also testing printed batteries as a power source for next-generation credit cards that will feature lighted images or a stream of personal ID codes. And in the next three to four years, TJ believes he can transform RRD from an old-fashioned, disappearing IOP printing business into a sophisticated technology firm with new synergies, growing revenues, wide margins and potentially attractive earnings.
Donnelley’s 2014 earnings of $1.60 will be lower than last year’s $1.69. However, share income for 2015 is expected to come in around $1.75 to $1.80. Revenue and income growth may be modest for several years, and share growth will remain modest until RRD’s new high-tech printing business begins to gain traction. The strong $1.04 dividend, yielding 6.9 percent, is attractive and secure, but even in the face of improving earnings, l think management has more important uses for its growing cash flow.
As long as you realize that this is a speculative issue, I don’t have a problem with your purchase of 300 shares of RRD. As a long-term investment, RRD could trade at the $25-$28 level in the coming three to four years. And if interest rates continue to remain low, a 6.9 percent return is attractive while you wait for those potential capital gains. RRD, which has substantial institutional ownership, could be a sleeper. And make certain that you reinvest the dividends.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
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