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Packaging Corporation of America (NYSE:PKG) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, PKG is currently valued at US$8.8b. I will take you through PKG’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
What is Packaging of America’s cash yield?
Free cash flow (FCF) is the amount of cash Packaging of America has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
The two ways to assess whether Packaging of America’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Packaging of America also generates a positive free cash flow. However, the yield of 3.89% is not sufficient to compensate for the level of risk investors are taking on. This is because Packaging of America’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Packaging of America’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at PKG’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 4.8%, increasing from its current levels of US$1.1b to US$1.2b. Although this seems relatively robust, breaking down into year-on-year growth rates, PKG’s operating cash flow growth is expected to decline from a rate of 5.8% next year, to -0.9% in the following year. However, the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Packaging of America as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Packaging of America to get a better picture of the company by looking at:
- Valuation: What is PKG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PKG is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Packaging of America’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.