Ennis (EBF): A High-Yield Dividend Gem in a Declining Industry

Investors seeking stability in a slowing economy often turn to dividend-paying stocks, but few offer the combination of a robust yield, defensive positioning, and undervaluation that Ennis Inc. (NYSE:EBF) currently provides. Despite operating in a mature, declining traditional printing sector, EBF's 5.4% dividend yield, consistent payout history, and fortress-like balance sheet position it as a rare value opportunity. Let's dissect why this overlooked stock could be a cornerstone of income-focused portfolios.

Dividend Sustainability: A 5.4% Yield Backed by Strong Cash Flows

Ennis' dividend yield of 5.4% stands out in a low-interest-rate environment, but what truly matters is whether it can sustain this payout. The company's payout ratio of 65% (TTM) is comfortably within a sustainable range, particularly given its strong cash flow generation. With no debt and $72.5 million in cash, Ennis has ample liquidity to cover its $0.25 quarterly dividend—now at a 4.4% annual growth rate—while retaining flexibility for strategic moves.

Critics may point to a slight dip in earnings—Q1 2025 EPS of $0.41 matched expectations but remained flat year-over-year—as a red flag. However, Ennis' interest coverage ratio, near infinity due to its debt-free status, and a cash flow-to-debt ratio of effectively infinite (since debt is zero) highlight its financial invincibility. Even if earnings stagnate, the company's cash reserves and free cash flow of $51.9 million (2024) ensure dividends remain secure.

Undervalued in a Mature Market: A 67% Discount to Fair Value

At $18.49 per share, Ennis trades at a 67.2% discount to its fair value estimate, according to consensus metrics. This disconnect arises from macroeconomic headwinds in its traditional printing business and concerns over top-line growth. Yet, the stock's price-to-earnings (P/E) ratio of 12.1 is far below its 5-year average of 16.4, offering a compelling entry point.

The undervaluation becomes more compelling when considering the dividend yield. A 5.4% payout, coupled with a low P/E, suggests the market has priced in worst-case scenarios while overlooking Ennis' defensive strengths. Even in a declining industry, the company's focus on high-margin specialty products and cost discipline has kept margins intact—Q4 2024 gross margins rose to 29.5%, up from 28.4% a year earlier.

Addressing EPS Stagnation: A Strategic Pivot to Growth

While EPS stagnation is a valid concern, Ennis' management has demonstrated discipline in capital allocation. The $92 million returned to shareholders in 2024, including a special dividend, was funded by operational cash flow rather than debt. Meanwhile, recent acquisitions—such as Northeastern Envelope Company—added $2.5 million in quarterly revenue, proving the company's ability to expand through accretive deals.

The underperformance of one acquisition is being addressed, and management cites a “robust pipeline” of future opportunities. This focus on M&A aligns with Ennis' strategy to capitalize on fragmented markets while avoiding overexposure to declining segments.

Why Now is the Time to Buy

Ennis checks all the boxes for a defensive income play:
- High yield with a sustainable payout.
- Zero debt and fortress balance sheet.
- Undervalued stock trading at a historic discount.
- Strategic growth initiatives to offset industry decline.

While the printing sector's long-term decline is undeniable, Ennis' focus on niche markets and its ability to generate cash without growth mean it can thrive as a dividend stalwart. For investors willing to look beyond macroeconomic noise, EBF offers a rare mix of income security and valuation upside.

Final Take: A Rare Value Play in a Defensive Portfolio

Ennis Inc. is far from a glamour stock, but its 5.4% dividend yield, rock-solid financials, and undervalued price make it a compelling contrarian bet. With a P/E near decade lows and a dividend that's grown for years despite industry headwinds, EBF is primed to reward patient investors. Buy now before the market catches on.

Risk Disclosure: All investments carry risk. Ennis' reliance on a declining industry and potential macroeconomic slowdowns are key risks.