Can a plastics company appeal to green investors?
Packaging is not the most exciting topic but a deeper look at what's going on at Amcor may spark your interest. As well as offering a good investment opportunity (in our opinion), Amcor is a world leader in packaging innovation and is looking to tackle some of the main environmental issues caused by plastic packaging, something that effects everyone.
Amcor is a global leader in consumer packaging, offering flexible and rigid plastic packaging and speciality cartons for the food, beverage, pharmaceutical and medical sectors. It is listed both in Australia and the United States, having been founded in 1860 in Australia.
It is one of the largest plastics packaging companies in the world, with sales of A$18 billion, operating in over 40 countries and employing approximately 46,000 people. Its equity (market capitalisation) is worth A$25billion.
Amcor provides plastic bottles and closures (rigid) and pouches and capsules (flexible) for a number of large food beverage and healthcare customers such as Colgate, Johnson and Johnson, Pfizer, Nestle and Coca-Cola.
Amcor provides investors with exposure to the consumer in multiple geographic regions. One of its key growth drivers is its supply of packaging to over 27 emerging markets.
Over the past 10 years Amcor has achieved an annual return of 15.1%, this compares to the ASX200 which has returned 10.7%, when reinvesting the dividends. Approximately half of this comes from a capital return (share price increase) and the other half from dividends.
Amcor currently yields just under 4%. The company does not pay any franking credits as the vast majority of its profits are made offshore and are not subject to Australian tax.
More recently, the pandemic has had mixed outcomes for Amcor. Operational issues, supply chain disruptions and increased costs, have offset the increased lockdown purchases of stay-at-home food, beverage and medical supplies. In its most recent result in August, Amcor posted record earnings, up 16%.
Amcor has a clear shareholder value creation model, meaning it has a clear target and strategy to create returns, which it has delivered on. It generates significant amounts of cashflow from what are mainly defensive end markets allowing it to grow profit by investing in its own business and acquiring other packaging companies.
Amcor then integrates the acquisitions into the existing business to create synergies, allowing Amcor to reduce its costs and also obtain new clients for its existing products. Amcor's acquisition strategy has allowed it to gain number one market share positions in many of the packaging substrates and regions that it competes in.
In addition to its acquisition strategy, Amcor prides itself on its product innovation. Amcor invests heavily in research and development, creating packaging specifically designed to meet its clients' needs. This involves using lightweight materials, designing packaging that is visually appealing to the end customer and helping to keep the products fresher for longer.
Emerging markets are also a key area of growth for Amcor and as market leaders in many countries, they are in a strong position to capitalise from the increased spending on fast-moving consumer goods (FMCG) which will occur in region such as Latin America and Asia as both populations and incomes rise.
Plastic is a controversial and topical subject amongst an increasingly environmentally aware world. At first glance, a large plastics manufacturer like Amcor would have a hard time convincing investors of its sustainability credentials, but it actually scores very well on our Environmental, Social and Governance (ESG) analysis.
Amcor has identified sustainability as a key growth opportunity and has pledged to design 100% of its packaging to be recyclable or reusable by 2025 and is on track to achieve this. This is ahead of many of its peers. It scores well in product innovation, creating products that use recycled materials such as PCR (post-consumer resin) and are compatible with existing and future recycling systems. It should also be noted that packaging, in general, reduces food waste by prolonging the shelf life of food. Food Waste is a key contributor to greenhouse gas emissions.
Amcor also scores well in governance metrics such as board composition, vision and strategy, and shareholder rights and on social metrics such as product responsibility and health and safety according to our analysis.
We rate Amcor as a buy. Its stable earnings stream has allowed it to create a long term record of delivering returns for shareholders which should continue for many years to come. Our metrics point to stronger earnings growth in 2022 relative to prior years thanks to higher margins being achieved on its incremental growth in revenue.
This is now being recognised by the market and is evident in the fact that the company's share price has recently started to outperform global peers after a period of underperformance. This earnings growth also supports the company's dividend payments to shareholders
Amcor offers a diversified exposure in terms of geography and product end-use and has a number of growth initiatives that are aligned with a more sustainably aware society.
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