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RR Donnelley & Sons Co (RRD): 6.0% Yield & Value Creating Spin-Offs

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The first thing that jumps out about RR Donnelley & Sons Co (NASDAQ:RRD) stock is its massive 6.0% dividend yield. RR Donnelley has paid steady or increasing dividends every year since 1985. Click here to see 12 other high dividend stocks.

Steady or increasing dividends since 1985 is impressive. What’s less impressive is that RR Donnelley has not increased its dividend payments since 2003. The company has paid $1.04 a share per year since 2003. Steady dividends aren’t bad, but they don’t give investors rising income.

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RR Donnelley has not paid increasing dividends since 2003 for good reason. Earnings-per-share were $1.65 in 2004.  In fiscal 2014, earnings-per-share were $1.64. The company has not been able to grow earnings-per-share in over a decade.  This is not a good sign for investors. The company’s operations are analyzed below to see why growth has stalled – and if the company will return to growth in the near future.

Out of more than 730 funds in the Insider Monkey database, the sentiment toward RR Donnelley is bleak with just 21 investors amassing less than 4% of the company’s outstanding stock at the end of June. Among them, Ron Gutfleish’s Elm Ridge Capital held the largest stake, containing 2.14 million shares, followed by Joel Greenblatt’s Gotham Asset Management, which boosted its to 1.89 million shares, representing an almost sevenfold increase over the quarter.

RR Donnelley Business Overview

RR Donnelley is the world’s largest commercial printer. The printing industry is in slow decline as electronic communication supplants printed channels. With that said, the printing industry is far from dead. Case-in-point; RR Donnelley made $328 million on revenues of $11.6 billion in 2014.

What is troublesome about RR Donnelley is its large debt load. The company currently has around $3.7 billion in debt. The company’s fiscal 2015 guidance calls for the following:

– Interest expense of around $272 million

– Adjusted EBIT of around $971 million

The company has an interest coverage ratio of about 3.7x. What is troublesome about RR Donnelley’s high debt load and fairly tight interest coverage ratio is its lack of growth, declining margins, and cash flow declines during recessions.

In 2005, RR Donnelley had an operating margin of 15.5%. By fiscal 2014, the company’s operating margin had fallen to 9.7%.

RR Donnelley’s earnings-per-share reached record highs in 2007 of $2.94. In 2009, earnings-per-share declined 65% to $1.03.

If margins continue their downward trend, or if another severe recession occurs RR Donnelley could have difficulty financing its debt obligations and potentially face bankruptcy.

Segment Analysis

RR Donnelley currently operates in 4 segments:

– Variable Print

– Publishing & Retail Services

– Strategic Services

– International

The image below shows the percentage of revenue from each of the company’s segments (and sub-segments).

RRD Revenue Breakdown
Source:  RR Donnelley Best Ideas Conference Presentation, slide 5

RR Donnelley & Sons Co (NASDAQ:RRD) is well diversified across its segments. All of the company’s various business units have low capital intensity; they require little invested capital to produce cash flows. Low capital intensity businesses typically generate strong free cash flows as less money is needed for capital improvements.

The image below highlights the company’s low capital intensity across segments, as well as the growth expectations for the company’s different segments.

RRD Summary Outlook

Source:  RR Donnelley Best Ideas Conference Presentation, slide 6

As you can see, both the publishing & retail and variable print segments havenegative expected growth.  The International segment is really a mix of the company’s 3 core business segments that are operating outside of the United States.  Only the strategic services segment is expected to provide positive revenue growth going forward.

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