February 5, 2023

Verso: Tons Of Cash And A Cheap Valuation (NYSE:VRS)

How is nobody talking about this? Verso (NYSE:VRS) has just announced a special one-time dividend alongside its regularly scheduled dividend. Does this mean Verso doesn’t need the cash especially in the midst of a possible decline in its main graphics paper vertical?

Thesis: Verso corporation is undervalued on a book value basis. After the sale of its two factories, it amassed a ton of cash promised to shareholders. This cash will help close the gap in its undervaluation and provide more value.

Verso does not look like it’s in the midst of a full turnaround, especially with its main vertical focus being graphics papers. So, why is it returning so much cash to shareholders and how might this affect its business going forward?

A Special One-Time Dividend to Close The Valuation Gap

Verso just recently announced that it was issuing a special one-time dividend. This dividend is to be $3 per share. This was previously meant to be part of the share buyback but has since changed.

If you are unfamiliar with special dividends, they work a bit differently than conventional dividends. In this type of situation, you cannot buy the stock before the ex-dividend and then sell it right after and still receive the dividend. Instead, you will have to pay out the dividend to the new shareholder on record.

It works in an interesting way too, you may think you have gotten away with it too since the cash appears in your account, but as soon as the payout hits the day after, if you no longer hold the stock, the money is then transferred to the new shareholder. This is so people can’t game the system.

Another interesting side effect of a special dividend is the very real increase in value. The below values are based on valuations at the time of writing, but the concept remains the same.

  • Verso book value = $29.15
  • Verso stock price = $13.51
  • Verso undervaluation to book value = ~54%
  • $3 dividend issued
  • New Verso book value = $26.15
  • New Verso stock price = $10.51
  • Verso undervaluation to book value = ~60%

So, as you can see, by running a simple math calculation, paying out a large cash dividend will actually increase the company’s undervaluation. This is typically done to create excitement around the stock and drive it towards a higher valuation.

Verso also has cash sitting on the sidelines that it plans to use for some share buybacks. Its already been buying back shares, but if it buys shares after the special dividend, it can significantly increase the value return to shareholders.

Idling Graphic Mills Amid a Demand Slowdown

Verso has most recently idled two graphics paper mills. The Duluth and Wisconsin mills. During the current economic slowdown and less demand for physical goods, for obvious reasons, one among them being health and safety.

I’ve been constantly harping on how Verso needs to move out of graphics paper, and instead, they decided to double down on it. Hopefully, now, they will see the value in diversifying their mill products. They are also talking about selling those mills outright, which might be a mistake if they can get more value through mill conversions.

Verso Touts Cost Savings

Verso is hyper focused on cost savings at this point and plans to use these savings to drive revenue in more attractive parts of the industry. They don’t specifically state how they are going to do this, but from what I can glean, they plan on pushing more on the pulp side of the business. From there, they can increase their specialty paper outputs.

It’s important for Verso to continue to compete on cost savings since there are many mills around the world that are competing with Verso products. One operates out of China and the Other Finland.

Weakening US dollar Provides Relief

The recent money printing of American dollars has had an adverse effect on the strength of the dollar which could be a blessing in disguise for Verso.

Nine Dragons Paper and Sappi Limited based out of China is seeing their products increase in prices in America as the USD falls in comparison to the yuan.

ChartData by YCharts

This weakening of the American dollar coupled with the increased trade barriers between the US and China could serve Verso well into the future.

On the flip side, UPM-Kymmene Corporation, a company in Finland is also seeing a weaker dollar compared to the euro.

ChartData by YCharts

It looks like competitors around the world are going to have trouble with the weakening of the US dollar. While this may remain temporary as the United States opens up into the future, it could create a short term and much-needed respite for Verso.

Positive Revenue and EPS Outlook

Currently, Verso is sporting a positive EPS outlook that may very well come to fruition. After their most recent earnings surprise in August, it’s a wonder why this stock has not increased in price at all.

Instead, the stock has languished at the $13 range and has yet to recover to its pre-March levels.

Risks Investing in Verso

While there are currently many positives investing in Verso, there are still some risks. These risks include:

  • Stock price not appreciating after the special dividend.
  • The book value is not as accurate as the company says. They may have no buyers for the factories driving down the price.
  • The value of the current assets could be worth less if inventory values decrease amid graphics paper price decline.
  • Management continues to dismantle company with no regard for future profits.

While these risks could prove very real, the low price of the stock makes the investment much less risky than if the price were even 50% higher.

Short-Term Investment Outlook

While demand for Verso’s products has dropped, it is in a good position to weather the storm. Headwinds in relation to currency, cost savings, and zero debt are all positives for Verso.

It’s only a matter of time until it rises past book value offering investors a great return. In the short term, cash dividends are especially welcome.

Disclosure: I am/we are long VRS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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