What happened
Shares of WestRock (WRK -1.02%) fell as much as 14% today after the company reported fiscal second-quarter 2020 operating results. Although the products the business creates are essential to daily life -- paper packaging is necessary for food, pharmaceuticals, and online retail, among other end markets -- operations will encounter headwinds during the coronavirus pandemic.
As a nod to that reality and the uncertainties of the situation, management has instituted a range of measures intended to preserve financial flexibility and reduce debt by $1 billion through fiscal 2021. One move in particular is dragging the stock down by double digits today: WestRock will reduce its quarterly dividend distributions from $0.465 per share to $0.20 per share.
As of 11:53 a.m. EDT, the dividend stock had settled to a 13.2% loss.
Image source: Getty Images.
So what
The coronavirus pandemic has altered consumer buying habits, which is expected to have a negative impact on WestRock. The effects weren't too dramatic in the three-month period ending March 2020, but stay-at-home orders only went into effect in the final two weeks of the quarter. Management's hasty moves to preserve cash suggest investors should expect a much more pronounced impact on operations during the three-month period ending June 2020.
In addition to slashing the quarterly dividend payout, WestRock will pay annual incentive and company 401(k) contributions in common stock during calendar 2020. The business has also decided to reduce fiscal 2020 capital investments from $1.1 billion to $950 million. Fiscal 2021 capital investments will be reduced to a midpoint of $700 million.
WestRock says the efforts are aimed at responding to a situation of uncertain duration while also prioritizing up to $1 billion in debt reduction over the next 18 months. The business doesn't have major debt maturities until March 2022.
Now what
While cutting the dividend hurts shareholders now, redirecting as much cash flow as possible to debt reduction will better position the business for success in the long run. Investors might hope the shock of the situation drives lasting changes at WestRock.
To be blunt, the business might have become a little too comfortable carrying high debt balances during its acquisition binge in recent years. But if those acquired assets deliver solid operating margins throughout the coronavirus pandemic, it could take some of the bite out of sharply reduced dividend payments.
