Can TC Transcontinental Recover?

Transcontinental Inc is Canada’s largest printing company and a leader in flexible packaging in North America. It is also a leader in specialty media segments in Canada.

Transcontinental operates through printing (more than 44% of 2019 revenues), packaging (53%), and media (3%) segments. The company has operations in Canada, the United States, and Latin America. Transcontinental operates through a large national printing network and has 29 packaging and 17 printing plants in Canada. Its media division is Canada’s largest publisher of French language educational resources.

As a leading printer in Canada, Transcontinental provides a broad range of solutions. Newspapers, magazines, books, and marketing products account for nearly 40% of the company’s printing revenues.

The company provides innovative solutions in both printing and packaging segments. It specializes in flexographic printing, lamination of plastic films, and offers print solutions for flyers, newspapers, magazines, and mass marketing products. Transcontinental diversified into packaging in 2014. The company also provides a broad range of innovative flexible packaging solutions.

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Revenue Growth & Market Exposure

With 45 years of experience under its belt, Transcontinental has successfully met its customers’ evolving and transforming needs. As a result, the company has been transforming its business.

It is investing to build a North American flexible packaging platform pursuing a diversified strategy. It is also developing its non-advertising based specialty media offering for the business, finance, and construction sectors. As a result, Transcontinental’s revenues have become more balanced over the years.

Transcontinental caters to a diverse mix of customers including retailers and publishers. Some of the most prominent names on its customer list are Loblaws, Metro, Sobeys, Home Depot, Walmart, Globe and Mail, Rogers, etc. The company has developed sticky customer relations with major retailers over the years. Multi-year agreements, as well as recurring orders in retailer-related services, grant cash flow visibility to the company.

In its printing segment, the company is looking at gaining market share by improving its efficiencies and managing long-term contracts. Transcontinental is targeting growth in its packaging division through acquisitions as well as organic growth.

The acquisition and successful integration of Coveris Americas strengthened the Transcontinental market share in the flexible packaging sector. As a leader in flexible packaging in North America, the company has increased its share of revenues from this sector from 2% to 53% of consolidated revenues in only five years.

The acquisition of Montreal-based Enviroplast in June this year further fortified its position in the flexible packaging recycling operations. Transcontinental continues to benefit from its transformation into flexible packaging.

Transcontinental’s packaging segment benefited from increased customer demand for food and everyday consumer products packaging in the U.S., Latin America, and Canada. The Printing business, however, witnessed a slowdown as a result of the pandemic. Overall, revenues declined by more than 19% during the quarter. Transcontinental disposed of its paper packaging operations at the end of the first quarter of 2020.

Transcontinental has developed deep expertise in the manufacturing and distribution of print and digital content. It is difficult for new entrants to challenge its leadership position in these markets due to long-standing industry connections. This also gives Transcontinental an edge over the competition.

Dividends

Transcontinental is a dividend aristocrat paying and raising its dividend for more than 25 years. It is one of Canada’s best dividend growth stocks. The company has achieved a dividend CAGR of 10.5% annually over the last decade. It last raised its dividend by 3.5% and also paid a special dividend in 2013.

Transcontinental sports an attractive dividend yield of 5.4% and has a reasonable payout ratio of 40% which indicates enough room for future growth. The company paid $76 million in dividends in the last year and it also has a share buyback program in place.

Transcontinental’s presence in allied printing and packaging segments allows the company to explore new opportunities across multi-platform businesses. Its acquisitions should also drive long term growth for the shareholders. Since its transformational phase over the recent years, Transcontinental has been able to deliver improved adjusted profitability.

The company generates enough cash to deploy toward strategic acquisitions and transformational activities. In fact, the flyer business is its biggest cash cow. However, the company’s indebtedness has also significantly increased during recent years. It reduced its net indebtedness by over $250 million in FY2019.

Though Transcontinental’s Printing business could remain impacted by the pandemic, its cost-cutting and operational efficiency should mitigate the impact of volume declines. The company’s packaging business is poised to gain in the current scenario as most of its operations support the retail supply chain for food and everyday consumer products.

Transcontinental is expecting its profit margins to increase slightly, when compared to the prior fiscal year, as a result of synergies and operational efficiency initiatives. The company also expects to continue generating significant cash flows from all its activities to support business acquisitions and reduce indebtedness. Transcontinental’s focus on promising markets, investments in advanced equipment, and strategic acquisitions position it well for future growth.

Competition

The packaging industry is highly competitive. The company competes with large integrated companies in the packaging segment as well as other foreign competitors in the printing industry.

Transcontinental’s printing segment suffers heavy competition from the advent of the internet. Postmedia Network Canada, Torstar Corp. are few of Transcontinental’s leading competitors. The acquisition of Coveris Americas has granted Transcontinental a major competitive edge in the lucrative flexible packaging industry.

Bottom Line

Transcontinental has a sound track record of continuous improvement and manufacturing excellence. The company continues to record organic growth on the back of improving profitability, operational efficiency gains, and better than expected synergies. It is well-positioned to take advantage of future business opportunities and continue its transformational journey.

The integration of Coveris Americas positioned Transcontinental as a leader in flexible packaging in North America. It has now built an extensive packaging platform through several strategic acquisitions.

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