Fundamentally Packaged!

The last post “Packaged”on March 26, 2021, looked at a selection of packaging producers as investment prospects for growth and income.  Shares of Amcor Plc offer the highest forward dividend yield among the selection of packaging producers.  It merits closer scrutiny.  Owens Illinois delivers one of the highest returns on equity in the group while Mondi Plc has been successful in converting more of its sales to operating cash flow than any of the other companies in the selection.  Thus, all three appear to be fundamental powerhouses.  Would investment in any one of them be an insult to the environment?

 

COMPANY	SYMB	RETURN ON EQUITY	SALES to CASH CONVERT	DIVIDEND YIELD	ESG REPORT	ESG GOAL
Amcor Plc	AMCR	15.26%	11.86%	4.06%	2012-20	100% recyclable products by 2025
Mondi Plc	MONDY	13.73%	19.75%	3.95%	2020	24% carbon reduction, 67% renewable fuel
O-I Glass, Inc.	OI	54.72%	7.50%	0.36%	2020	50% recycled content by 2030; 40% renewable energy by 2030

 

Swiss packaging manufacturer Amcor Plc (AMCR:  Nasdaq) has listed its shares on the iconic U.S. quotation service, given U.S. investors easy access to its plump dividend.  In the year 2020, Amcor earning an operating profit of 10.89% on a mix of flexible and rigid packaging products.  Amcor converted 11.86% of sales to operating cash flow, providing plenty of cash for a payout of $0.47 in 2021.  

Amcor publishes a sustainability report, publishing the last one in November 2020.  Unfortunately, for many companies a sustainability report is not much more than a coffee table book with lots of green pictures and not really very much substance.  Investors can at least look at whether Amcor is achieving its goal of producing 100% recyclable products by 2025.  That is only four years away.  By the end of 2020, approximately 60% of is sales were derived from fully recyclable products. 

While the recyclability of its products appears to be improving and its products are potentially less likely to end up polluting the environment, there are other considerations.  In 2020, Amcor reports increasing its use of postconsumer resins to 4.3% of total resins purchased. Additionally, Amcor increased its use of bio-based raw materials to 14% of total materials used in 2020.  These are fairly small numbers, but at least Amcor is disclosing where they are positioned in the battle to end the use of virgin plastic and make the shift to bio-based materials.

Amcor also reduced its own waste from operations by 10% in 2020 compared to 2019.  Last year the company also joined the World Wildlife Fund Resource consortium that is focused on keeping waste out of the environment where wildlife can be harmed.   

The iconic glass manufacturer Owens Illinois likes to be known today as O-I Glass (OI:  NYSE).   O-I is a bit less ambitious than Amcor on the recycling objective, content to achieve 50% recycled content by 2030.  That said, the company has signed on to the concept of ‘zero waste’, which is another way of expressing 100% recyclability.  To that end O-I has pledged investment in research and development for glassmaking processes that use low-carbon alternative fuels to produce recyclable glass. 

While most of its environmental program appears to be aspirational, O-I is specific in its goal to reduce greenhouse gas emissions by 10% by 2025 and by 25% by 2030.  The numbers may seem low, but it is important to consider that glass making has a very large carbon footprint.  For example, a glass bottle of water could have a carbon footprint in a range of 265 grams to 500 grams.  While a similarly sized plastic water bottle could have a carbon footprint in a range of 44 grams to 600 grams. 

O-I grabs 7.5% of each sales dollar for its operational cash kitty, providing the company with investment capital and dividends.  The current yield on the company shares is an unimpressive 0.36%.  However, the stock has delivered 124% price growth to shareholders over the least year.

For investors who do not want to venture past the U.S. dollar and U.S. stock exchanges, shares of Mondi Plc (MNDI:  LON, MONDY:  OTC) are quoted at Over the Counter in the U.S.  The forward dividend yield is currently 4.20% for the shares traded in London in the Great Britain pound, but U.S. dollar shares quoted on the OTC list see currency trim to 4.04%.  One way or another Mondi offers a tasty dividend for investors who can get comfortable with the company’s environmental track record.

The dividend appears secure for the time being given Mondi’s 13.39% operating profit margin and success in converting 19.75% of its 2020 sales dollars into operating cash flow.  Those cash flows are as important for supporting the dividend as they are for investing in ‘greener’ production processes. 

Mondi offers its most recent sustainability report in a smart corporate website with lots of pretty pictures.  Investors should not be influenced by imagery, but in Mondi’s case there are real accomplishments to celebrate.  The company’s 2020 sustainability report notes 24% reduction in total greenhouse gas emissions since 2014.  What is more the company was 100% electricity self-sufficient in 2020 and has adopted biomass-based sources for two-third of its fuel needs.

While Mondi appears to have put some effort into its environmental performance, it has set out specific goals for the coming years.  The most aggressive appear to be 1) the goal of making its products 100% reusable, recyclable or compostable by 2025 and 2) reducing greenhouse gas emissions related to Mondi’s energy use by 34% per metric ton of saleable products by 2025.  If achieved, Mondi’s products will have a substantially lower carbon footprint in just the next four years. The achievement could be a big plus for Mondi’s pitch to its customers around the world who need to use cardboard boxes and paper products with claims to lower carbon footprint.

 

It is interesting that the packaging industry with its voracious appetite for energy and raw materials, has so enthusiastically embraced environmental conservatism.  The real accomplishments of the industry stand in stark contrast to the oil and gas industry, which remains largely in denial of its self-made sink hole of pollution.  None of these companies appear to have a perfect track record, either financial or environmental.  However, performance is sufficiently strong to merit serious consideration by investors looking for income and growth with responsibility.  

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.