Whichever way you wrap it up, it’s an unmade dividend payment. DS Smith, the paper and packaging group, yesterday became the latest FTSE 100 company to call a halt to its dividend, suspending the declared interim payout of 5.4p a share in a move that gives it £74 million of extra capital.
Reassuringly, it gave every indication to its shareholders that it wasn’t being forced into an emergency measure because of a funding shortfall or trading crisis. It may also add some, if not all, of the missed half-year payment to the final dividend (set to be outlined at its results for the year to the end of April) due to be declared in July. Nevertheless, the decision lays down the clear marker that, if the coronavirus crisis becomes prolonged, investors may find that they have to wait for that, too.
DS Smith is one of three big London-listed paper and packaging businesses, with Mondi and Smurfit Kappa. Founded in 1940 as a box manufacturer, it makes about 80 per cent of its profits from supplying packaged fast-moving consumer goods, operating in 37 countries and employing more than 31,000 people. It is headquartered in London, has a market capitalisation of just under £4 billion and, in its most recent financial year, it made a pre-tax profit of £350 million on revenues of nearly £6.2 billion.
The nature of DS Smith’s business, which includes supplying packaged food and drinks and other products to supermarkets, means that in almost every one of its markets it has been classified as essential. As a result, all its factories have remained open, albeit under rules governing social distancing.
The heightened demand for goods ranging from lavatory rolls to tinned baked beans has lifted demand for DS Smith’s boxes. It also operates in ecommerce, delivering the packaged goods that consumers order online, including for the likes of Amazon, so it has benefited from consumers buying additional goods — from batteries to light bulbs — over the internet. However, though not substantial, DS Smith also has exposure to the industrial sector, supplying packaged parts to auto manufacturers, for example, and trading here will have suffered from factory closures and reduced production. The group was being deliberately circumspect about the precise impact of Covid-19 on overall trading so far, but it is likely that — at least for the moment — the pluses outweigh the minuses.
Advertisement
Strikingly, although it emphasised yesterday that it was suspending the dividend payment for reasons of financial prudence, DS Smith was happy to confirm its stated guidance, unlike numerous other companies. It expects its return on sales of 11 per cent over the six months to the end of October to be similar for the subsequent half-year period.
here is much to feel optimistic about with DS Smith, which generates plenty of cash from its day-to-day activities and is not overly encumbered with debts. It has an as-yet-untouched credit line of roughly £1.4 billion and no substantive debts that will need to be refinanced before 2023. All told, its leverage at the end of this month is expected to be about twice profits before tax, interest and other items, which is manageable.
DS Smith has been unloved by the stock market for too long and its share price has been pummelled this year, in spite of its resilience in the face of Covid-19. The shares, flat at 292p, look cheap, trading at just under nine times Jefferies’ forecast earnings. Assuming that the dividend is paid later, the yield is above 5.7 per cent. The shares are a clear “buy”.
ADVICE Buy
WHY Locked into the structural growth of fast-moving consumer goods and online deliveries and the shares are cheap
Hays, Page Group, Robert Walters, Sthree
For those of us lucky enough still to be gainfully employed, now is probably not the best time to go looking for a new job. It should come as no surprise, then, that the stock market’s main recruitment companies have been savaged since the lockdown, when much of the jobs market promptly froze.
All the big listed recruiters — Hays, Page Group, Robert Walters and Sthree — have responded by cutting jobs and costs. Indeed, Hays has gone one step further, carrying out a quick-fire discounted share-placing at the beginning of the month to raise £200 million. It did this in part to ensure that it remained debt-free, but also to position itself to capitalise on opportunities when corporate life resumes in earnest.
Advertisement
With the exception of Sthree, these recruitment firms share broad similarities, in that they specialise in white-collar professional job placements, from lawyers and accountants to laboratory technicians. As well as Britain, they operate extensive international placement businesses. While Hays is the largest and probably the most diverse in terms of career variety, Sthree is the most specialised, concentrating on science, technology, engineering and mathematics. For investors, all are noteworthy for the indication that their trading gives about the health of the wider economy.
It doesn’t look good. At the beginning of the month, Hays issued a profit warning and cancelled its interim dividend. Sthree followed this week by dropping its final dividend and suspending guidance. Yesterday, Page reported an 11.7 per cent decline in its first-quarter profit to £181.8 million, with March responsible for the vast majority of the drop. Robert Walters suffered a similar 11 per cent fall in quarterly gross profit to £87.4 million. Some areas, such as temporary placements and contract work, have held up, but it’s clear that the earnings of the recruiters are going to be hit hard.
Shares in all four have been clobbered since mid-February, although they have rallied a little in recent days. This is probably a sector best avoided because of the impact of Covid-19 and the likely ensuing recession.
ADVICE Avoid
WHY Jobs markets have seized up and earnings will be badly hit
