R.R. Donnelley: 6.0% Yield & Value Creating Spin-Offs

The first thing that jumps out about R.R. Donnelley (RRD) stock is its massive 6.0% dividend yield. R.R. Donnelley has paid steady or increasing dividends every year since 1985.

Steady or increasing dividends since 1985 is impressive.What’s less impressive is that R.R. 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.

R.R. 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.

R.R. Donnelley Business Overview

R.R. 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; R.R. Donnelley made $328 million on revenues of $11.6 billion in 2014.

What is troublesome about R.R. 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:

The company has an interest coverage ratio of about 3.7x. What is troublesome about R.R. 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, R.R. Donnelley had an operating margin of 15.5%.By fiscal 2014, the company’s operating margin had fallen to 9.7%.

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