Pat McKeough recently replied to a Member of his Inner Circle who asked about one of Canada’s remaining income trusts. The largest packaging distributor in Canada, this company chose to retain its trust structure despite the government’s 2011 decision to end tax breaks for income trusts.

Richards Packaging has over 14,000 customers, just over half in the U.S. and the rest in Canada. The company’s long-standing customer relationships and its focus on niche markets are a plus, says Pat, as is the 4.0% yield. The challenge is to sustain those advantages in a very competitive industry.

Q: Pat: Can I have your opinion on Richards Packaging, please? I am a long-term conservative investor, looking for safe stocks, some growth and good dividends. Thank you.

A: RICHARDS PACKAGING INCOME FUND (symbol RPI.UN on Toronto; www.richardspackaging.com) is a full-service packaging distributor to small- and medium-sized North American businesses.

The fund first sold shares to the public at $10 a unit, and began trading on Toronto in April 2004. In 2011, Richards decided to remain an income trust despite Ottawa’s move to drop tax breaks for businesses structured that way.

Richards is the largest packaging distributor in Canada and the third largest in North America. The company distributes more than 5,000 different types of cardboard, glass, and plastic packaging containers such as bottles, caps, trays and food cups. These products are sourced from over 600 suppliers and from its own manufacturing facilities.

The fund’s customers include over 14,000 regional food, beverage, cosmetic, chemical, and pharmaceutical companies throughout North America. About 48% of its sales come from Canada and 52% from the U.S.

Richards is the only North American distributor of rigid-plastic packaging containers that has its own manufacturing facilities. These facilities supply roughly 10% of its sales.

The fund also owns McKernan, the largest buyer and reseller of surplus packaging in the U.S. In October 2007, Richards paid $30 million U.S. for that firm.

Dividend stocks: 2015 acquisition contributes to rising revenue

The company revenue rose 54.4%, from $182.3 million in 2011 to $287.0 million in 2016. That’s partly due to Richards’s October 2015 purchase of Healthmark Services Ltd. for $16.8 million. This firm makes sterile intravenous, chemo and oral drug packaging and dispensing systems.

The cash flow for Richards’ overall operations rose 2.4%, from $1.25 a unit in 2011 to $1.28 a unit in 2012. Cash flow then fell to $1.09 a unit in 2013, but turned around and rose to $1.23 a unit in 2014. It climbed again in 2015, to $1.52 per unit, and then to $2.02 in 2016.

For the three months ended September 30, 2017, revenue rose 2.4%, to $73.5 million from $71.8 million a year earlier. Cash flow rose 6.5%, to $7.7 million, or $0.71 a unit, from $7.2 million, or $0.67 a unit a year earlier.

In April 2017, the trust increased its monthly distribution by 17.6%, to $0.11 a unit from $0.0935 a unit. The units currently yield 4.0%.

Richards’s long-term debt of $58.6 million is a low 18% of its market cap.

The company operates in a very competitive industry, but it continues to benefit from its focus on niche markets. Established in 1912, Richards also benefits from its longstanding relationships with customers. In addition, the high U.S. dollar continues to enhance the contributions of its operations in that country.

Inner Circle recommendation: Richards Packaging Income Fund is okay to hold.

For our recent report on a Canadian dividend stock that we rate as a buy, read, Canadian niche stock fills profitable roles in government and business.

 For our views on making the best buys in dividend stocks, read The Best Stocks with Dividends Share These Qualities.