“Our product is renewable, recyclable, and biodegradable,” said Tony Smurfit, Group CEO of the FTSE 100 company Smurfit Kappa Group (LSE:SKG) when it released its latest results recently.
Smurfit Kappa is a paper packaging company with a worldwide client base. It manufactures, distributes, and sells paper-based packaging products. That means that the company is, so to speak, at the front line in the battle against climate change and plastic pollution. That makes it popular with ethical investors.
These days, however, there is more to ethical investing than a sense of doing good. Because of the threat posed by climate change and unsustainable practices, companies that fail to address these issues may increasingly find their products are losing popularity with customers as well as falling foul of regulators.
According to a survey from Kantar, 17% of consumers cite packaging waste as their biggest concern. That’s what makes Smurfit Kappa shares so interesting — it specialises in the type of products that are likely to see increasing demand.
The results and the future
Smurfit Kappa’s latest results were good — earnings before interest, tax, tax, depreciation, and amortisation (EBITDA) increased 7% in the latest 12-month period compared to the year before. Profit before tax was €677, compared with a loss of €404m last year, and dividends are up 12%.
The results are good, but not stellar — revenue increased by just 1% and operating profits actually fell 4% on the year before. This drop was largely due to one-off charges, such as a fine levied on the Italian part of the business.
Doubts still linger about the company’s debt. Net debt actually increased from 2 times to 2.1 times EBITDA over the last year. On the other hand, free cash flow is at a healthy €547m and increased 11% on the year before. The company has also extended its debt maturity date. To put things in perspective, 10 years ago, net debt was twice the current level.
Dividends, which currently stand at 3.5%, have been increasing every year since 2011. A 3.5% yield isn’t high enough to get an income investor’s pulse racing, but the update trend is a welcome sign.
However, it’s the longer term potential of Smurfit Kappa that I think makes this company exciting. As more and more consumers demand better packaging, Smurfit Kappa is likely to see demand for its type of product explode.
Sure, it has competitors, including a number of Chinese companies. On the other hand, some have speculated that the company could soon come under the radar of a larger company looking for a mergers and acquisitions target.
I think that Smurfit Kappa shares should appeal to ethical investors, as well as income investors who are hoping to see dividend yields increase over time.
