ii view: trading fine, but DS Smith still scraps dividend

Favourable trends are offset by the loss of dividend income. Buy, sell or hold?

Trading update ahead of 30 April 2020 year-end

• Trading remains in line with expectations
• Cancelling the half-year dividend payment 
• £1.4 billion of funds available and undrawn

Chief executive Miles Roberts said:

"Trading within the business has been resilient, reflecting our focus on FMCG (Fast Moving Consumer Goods) and e-commerce customers and I am indebted to the ongoing tremendous support received from all our employees especially during this challenging time. 

"We continue to work with our customers and suppliers to ensure delivery of essential supplies and are encouraged by the performance of the business, despite the very challenging environment, but are taking a prudent approach to cost and capital allocation until there is greater certainty in the macro-economic outlook."

ii round-up:

Paper and packaging maker DS Smith (LSE:SMDS) today reported trading in line with its previous estimates.

Relatively little impact from Covid-19 had been experienced, although management did consider it prudent to cancel the previously announced half-year dividend payment.

Against a backdrop of renewed coronavirus concern, DS Smith shares were little changed in midday UK trading. Rival Smurfit Kappa (LSE:SKG) shares were down just over 1%. 

As a supplier of packaging to sectors such as food, many governments now classified it as critical, with all its factories still operational. 

Demand volumes for southern European markets such as Italy and Spain had been most impacted. Northern operations, including Germany and the UK, less so, with Eastern Europe suffering no meaningful impact to date. US demand had remained relatively robust, consistent with the broader group. 

Smith recently sold its plastics division given a move by customers towards more environmentally friendly paper-based packaging. Over 80% of all corrugated packaging sold by Smith is sent back to its paper mills for recycling. 

Cost cutting measure now include the waiving of annual bonuses by executive directors. Full-year results are expected to be announced in early July. 

ii view:

DS Smith offers the chance to invest in a European and North American paper and packaging company. Paper assets are managed to support its packaging operations. 

Structural growth drivers focus on e-commerce expansion, environmental trends to replace plastic packaging and the requirement for more sophisticated packaging from retailers. The corona crisis and lockdown measures taken to battle it have further amplified the significance of e-commence trends.

For investors, exposure to both e-commerce and environmental trends are clear long-term positives. Geographical diversity adds to the company’s attractions. But scrapping the dividend removes a key attraction, while the company’s exposure to industrial clients such as automotive makers should not be forgotten. For now, a wait and see approach may be most sensible. 

Positives: 

• Exposure to e-commerce and environmental trends
• Ongoing cost saving programme

Negatives:

• Dividend attraction removed
• Group input costs are volatile

The average rating of stock market analysts:

Strong hold