Recently Pat McKeough replied to a Member of his Inner Circle seeking his opinion on one of Canada’s remaining income trusts. The company is this country’s largest packaging distributor.

Richards Packaging Income Fund has more than 14,000 customers in a variety of businesses. A little over half of them are in the U.S., with the rest in Canada. Its strong presence in niche markets and long-standing customer relationships are both pluses, says Pat, as is the 3.5% yield. But the company must maintain those advantages in a highly competitive field.

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Hi Pat: I would like to get your opinion on Richards Packaging. Thanks.

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 stock 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.

The fund is the largest packaging distributor in Canada and the third largest in North America. It 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 Richards’ own manufacturing facilities.

Over 14,000 regional food, beverage, cosmetic, chemical, and pharmaceutical companies, spread across North America, make up the fund’s customer base. 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 with its own manufacturing facilities. They 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: Cash flow jumped 18.0% in the most recent quarter

Overall revenue rose 62.7%, from $182.3 million in 2011 to $296.6 million in 2017. That’s partly due to Richards’s October 2015 purchase of Healthmark Services Ltd. for $16.8 million. The 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. Cash flow edged higher in 2017, to $2.03 per unit.

For the three months ended March 31, 2018, revenue rose 1.4%, to $72.9 million from $71.9 million a year earlier. Cash flow jumped 18.0%, to $7.3 million, or $0.63 a unit, from $6.2 million, or $0.53 a unit, a year earlier.

In April 2017, the fund increased its monthly distribution by 17.6%, to $0.11 a unit from $0.0935 a unit. The fund’s units are up 26.9% over the past year, and now yield 3.5%.

Richards’s long-term debt of $57.9 million is a low 15% of its market cap.

While the company operates in a very competitive industry, it continues to benefit from a focus on niche markets. Established in 1912, Richards also benefits from its longstanding relationships with customers. In addition, a higher 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.

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