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That stack of cardboard that makes its way into your recycling bin every week may have given you a hint already that the past 14 months or so has made it a big year for cardboard. With households taking delivery of everything from e-bikes to laptops, cardboard packaging has been in huge demand since the start of the pandemic.

Good news for packaging manufacturers like DS Smith (SMDS), you would have thought. But while much of the cardboard used to package that endless stream of deliveries brought to the nation’s front doors up and down the country has left cardboard recycling plants filled to bursting point, too much of it is still out and about and that is causing problems in the industry.

The issue is that pre-pandemic, when most deliveries were made in bulk to High Street shops and restaurants, packaging quickly made its way back into the system. But now with still far too many empty cardboard boxes cluttering up people’s lofts, garages and spare rooms, cardboard is not making its way back to recycling plants quickly enough and packaging companies like DS Smith have found themselves short of raw material; the very lifeblood of their business.

Speaking to the BBC, chief executive Miles Roberts, said:  "One of the challenges for us is that, with so much packaging now in people’s homes or in their garages, how do we get that paper back into the recycled network? How we can get it back into our mills so we can convert it into paper and reuse it again?"

The Brexit deadline at the end of last year did not help either. At a time of year when demand for packaging is always greater anyway because of Christmas, the fact that retailers and suppliers started stockpiling boxes in case they ran out, has also contributed to the short supply in the cardboard ‘eco system’.

And that is a real problem for DS Smith. The FTSE 100 sustainable packaging company is reliant on the ‘circular economy’ working efficiently and prides itself on being able to make, use, collect and recycle cardboard packaging within 14 days. But with all those millions of boxes loaded on delivery vans or in people’s homes, it ran out of supply; hitting the manufacturing process and ultimately leaving the retail sector with problems getting hold of this vital packaging.

This problem led in part to the company’s decision to cancel its final dividend; a move which surprised many and disappointed investors.

Looking at its latest figures, you might have expected the UK’s biggest box-maker, whose long line of customers includes Amazon, to have upped pay outs, not cut its dividends altogether. It reported pre-tax profits of £368 million in the year to the end of April, up from £350 million the year before. But the group, which also decided not to pay an interim dividend payment in April, blaming “macroeconomic uncertainty”, said it simply did not know when pay outs would resume.

There is no doubt that lockdown shopping has been good for DS Smith’s business, but the seismic shift has brought its own problems and this proudly sustainable company is not going to start cutting corners to meet demand.

Its eye is firmly fixed on sustainability. Earlier this month it announced a series of ambitious climate targets, including a science-based target to achieve a 40% reduction of CO2 emissions per ton of product by 2030, compared to 2019 levels, and a commitment to reach net-zero emissions by 2050.

DS Smith also announced its membership in the UN’s Race to Zero. To achieve these targets, it will further adopt a number of engineering solutions, including using local biomass and biogas, and renewable electricity like wind and solar.

It has set a goal to manufacture 100% recyclable or reusable packaging by 2023. Another one to reduce CO2 emissions against a 2015 baseline by 30% relative to production, by 2030, and to take 1 billion pieces of problem plastics off supermarket shelves by 2025. 

As well as that exhausting list of goals it also recently announced its $140 million R&D and innovation package to accelerate its work in the circular economy.

What investors will really want to know though, when DS Smith posts its full year results on Tuesday, is whether the cautious approach taken towards its balance sheet has shifted and dividends are back on the agenda.

And there is also that ‘will they, won’t they?’ question still lingering over whether rival Mondi will make a bid for the company. 

More on DS Smith

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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