Summary
- WestRock Company cut its dividend in May as part of a cash preservation strategy in the face of COVID-19.
- The firm's packaging business will benefit from the trend towards paper packaging and from the growth in online retail.
- The stock currently trades at a 47% discount to fair value.
WestRock Company (WRK) may not seem like a value pick at the present time, given that it reduced its dividend in May to preserve cash, but the company is poised to benefit from the growing preference in paper packaging and from the shift to online shopping. As such, it merits consideration as a value investment.
Some investors may dismiss such considerations in light of the dividend cut. The dividend had been reliably raised annually since the merger of MeadWestvaco (MWV) and Rock-Tenn (RKT) in 2015. However, the impact of COVID-19 on the global economy has forced WestRock's hand, leading to adopt a cash preservation policy which entailed not only a 75% cut to the dividend (from $0.80 per share to $0.20 per share) but a reduction in planned capital investments for the coming financial year. As per WestRock's CEO Steve Voorhees:
We are adapting quickly to the uncertain economic and market demand conditions and taking steps that we expect will provide an additional $1 billion in cash available for debt reduction through fiscal 2021. We are confident in our differentiated strategy and value proposition, and believe these steps will ensure that WestRock remains well positioned for long-term success.
Even before COVID-19, a cash preservation strategy would have been advised to shore up the firm's balance sheet. The $16 billion merger in 2015, which was the largest in the paper sector since 2005, created the third-largest paper producing company in the world by tons produced and the third-largest in the U.S. by market share. In 2020, WestRock retains a strong position among the top twenty global packaging firms, though it has been costly to retain that ranking, as WestRock has went the M&A route to maintain its competitive edge.
The same year of the merger, WestRock acquired SP Fiber Holdings, a producer of kraft and bag paper and of recycled containerboard for $288.5 million. In January 2017 it acquired Multi Packaging Solutions (MPSX) in a deal estimated to have cost $2.28 billion, and in May 2017 it also acquired five facilities from U.S. Corrugated for approximately $192 million. Furthermore, in August of the same year WestRock picked up Australian firm Hanna Group for AUD$75 million ($52.12 million) and closed 2017 by announcing it had bought the assets of Plymouth Packaging for an undisclosed sum.
