Johnson Controls Inc (JCI), Williams-Sonoma, Inc. (WSM): 4 Consumer Cyclicals With Income & Growth

Williams-Sonoma, Inc. (NYSE:WSM) has solid balance sheet, with almost no long-term debt and about 20% of assets in cash and equivalents. Its capital deployment policies are shareholder friendly, as evidenced by its generous share repurchase program and a 40.9% increase in its quarterly dividend earlier this year. Williams-Sonoma, Inc. (NYSE:WSM) currently yields 2.3% on a payout ratio of 44% of the current-year EPS estimate. The company’s direct-to-customer segment, accounting for 46% of revenues, is one of its strongest points. Its international expansion, with strong branding power, will support Williams-Sonoma’s continued financial expansion. Still, when considering this stock, it is necessary to pay attention to its valuation, which is slightly above the sector’s average, and to weigh in the prospect of a possible adverse effect on U.S. housing from rising mortgage rates.

Packaging Corporation of America

Packaging Corp Of America (NYSE:PKG), the fourth largest producer of containerboard and corrugated packaging in the United States, has also seen revenue and earnings momentum amidst a pricing power and recovering volume growth. In fact, this company and its industry peers have benefited from the industry consolidation that has created conditions for price increases amid capacity reductions. The companies in the industry have implemented a few containerboard price hikes, including the one in April.

According to the company, the April price increase is expected to have a major earnings effect in the third quarter of this year when the higher prices are passed through to corrugated products. Market analysts hold that the imposed price increases will likely stick, producing higher earnings and cash flow. Packaging Corp Of America (NYSE:PKG) is already on a roll, as its first-quarter EPS excluding special items surged 47.6% year-over-year on a 12% increase in revenues, due to higher containerboard and corrugated products prices and mix and higher sales volumes. In fact, the first-quarter results featured all-time records for sales, corrugated products shipments, and EPS.

The company’s improving free cash flow is already resulting in higher returns to shareholders. In May, the company announced a 28% dividend hike, its second increase this year, which has bolstered its yield to 3.3% on a payout ratio of 54% of the current-year EPS estimate. Next year, Packaging Corp is forecast to deliver a 16.3% increase in EPS, which will likely support additional dividend boosts. While the forest products industry researcher RISI sees modest growth in U.S. containerboard apparent consumption this year and next, any acceleration in the overall economic growth, including consumer spending, could provide an impetus to stronger volume growth that would complement higher pricing. Still, the downside risks exist, if lackluster volume growth and increased supply due to higher prices undermine the currently solid fundamentals.


McDonald’s Corporation (NYSE:MCD), the world’s largest chain of fast-food restaurants, is ready to see better comparable store performance as restaurant conditions improve in the United States amid an improving economy and the European recovery takes hold in the second half of this year. Even though the company’s business model makes this stock a defensive play that performs well in the downturns, the stock also benefits from pro-cyclical forces.

The strengthening economy in the United States, including a stronger employment growth, is supporting a modest rebound in the restaurant industry indicators. In addition, the company’s popular breakfast and everyday value options support stronger sales performance. In Europe, the outlook has also started to improve on the back of summertime promotions in some countries. The European market environment is generally expected to improve later this year.