A Citi Research investment report published March 10th suggests that improvement in the financial situation of pension funds of companies in the paper and forest products sector is leading to stronger balance sheets. Citi analysts Anthony Pettanari and William Mitchell furthermore suggest that improved balance sheets are likely to result in an increase in company share prices and more mergers and acquisition activities.
Improvements in pension funding
The analysts provide further details on pension funding in the report. “Pension assets grew 8% Y/Y on average for our producers while liabilities (PBO) fell 6%. Pension funding improved to 86% from 74% in 2012 & there are no producers below the critical 70% level, down from 3 companies LY. Looking at pension underfunding as a percent of market cap, RKT (12%), IP (10%) and BLL (7%) are the standouts, although IP’s funding improved $1.9 B ($4.30/sh) while RKT’s improved $490mm ($6.70/sh).”
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Decreasing contributions in 2014
The report also points out that the continuing improvement in pension funding means that companies can continue to decrease their contributions to pension funds. “…on average contributions were down ~30% Y/Y; only Ball Corporation (NYSE:BLL) & Avery Dennison Corp (NYSE:AVY)’s contributions were higher Y/Y.The largest declines were Rock-Tenn Company (NYSE:RKT) (- $179mm) & OI (- $115mm). 9 of 13 companies are planning to make smaller cash contributions in 2014vs. 2013 with the biggest declines at BLL (-$131 mm) & AVY (-$85mm).”