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Why Amcor Limited’s (ASX: AMC) record dividend failed to save its share price today

A margin squeeze, the lack of earnings growth and a big acquisition wasn’t enough to stop Amcor Limited (ASX: AMC) from increasing its final dividend to a record high.

The packaging giant said it would pay a final dividend of US24 cents per share, up from last year’s US23.5 cents, which works out to 32.65 cents when it unveiled its full year results. This gives Amcor a yield of just over 4%.

The news wasn’t enough to impress with its share price slumping 4% in morning trade to $13.71, making it the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

Amcor posted a 0.6% drop in sales and a 0.2% decline in net profit in constant currency terms for the year ended June 30, 2018, as management tried to get investors to focus on the future.

Here are some of the key highlights from the results:

  • Higher input costs have impacted on margins as earnings before interest and tax (EBIT) margins fell to 11.6% from 12%.
  • Management believes it has seen the worst of the margin squeeze as it is starting to pass on some of the cost increases to its customers.
  • The North American beverage segment is also showing modest signs of recovery and that organic growth in emerging markets have picked up to 4% in 2HFY18.
  • Amcor’s earnings per share (EPS) of 62.6 cents is largely inline with consensus forecasts and analysts are expecting 8% EPS growth in FY19.
  • If you account for the favourable exchange rate, Amcor delivered sales growth of 2.4% to US$9.3 billion and net profit growth of 3.3% to US$724 million.

I think Amcor is starting to look interesting if management can successfully bed down the $9 billion all-scrip acquisition of US rival Bemis Company, Inc. This transaction will turn Amcor into the world’s largest packaging group with significantly greater exposure to the US market.

This makes Amcor a good way to gain exposure to the world’s largest economy and the strengthening US dollar.

Putting the impact of Bemis aside, Amcor is expecting “solid” growth in both its flexible and rigid plastics businesses in FY19, although growth will be weighted towards the second half of the financial year.

This indicates to me that there is room for consensus earnings upgrades if Amcor can extract greater synergies from the Bemis merger.

Amcor will issue 5.1 of its shares for each Bemis share and shareholders in the ASX entity will end up owning around 70% of the merged group.

I am hoping Amcor will fall to around $13 as that would put the stock in the buy zone in my view.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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