Mondi isn’t the only FTSE 100 defensive stock I’d buy and hold forever

Mondi plc (LON: MNDI) could be an overlooked FTSE 100 (INDEXFTSE:UKX) stock, with great long-term potential.

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When you’re considering a new investment, there’s never going to be anything in the FTSE 100 that’s likely to surprise, you might think. Well, I’ve just been looking over London’s top 100 companies again, and I’m surprised how many I’ve been neglecting.

Take Mondi (LSE: MNDI), for example, whose shares have more than doubled over the past five years while earnings have been steadily climbing. And shareholders have had decent dividends of around 3% per year to bring the total five-year return to around 150%.

Mondi does something really simple and defensive. It produces paper and packaging, and that’s always going to be in steady demand. But why has it remained under the radar for so many investors?

Mondi’s growth has been partly through acquisition, and there are inherent dangers of over-stretching with that approach. But in this case I see measured and prudent purchases.

The firm’s latest was announced Monday, and it involved the takeover of National Company for Paper Products and Import & Export (NPP) of Egypt for €23.7m. NPP makes industrial bags, and it looks a good fit for Mondi’s Middle East operations where it bills itself as “the leading industrial bags producer” with four existing plants in the region.

As for any over-stretching fears, Mondi seems to be keeping its net debt under firm control. The figure stood at €1.33bn at 31 December, down from €1.38bn a year previously. That’s less than underlying EBITDA of €1.44bn, and almost exactly in line with operational cash generation last year.

I’d be happy with anything up to about 1.5 times EBITDA, so this level of debt does not worry me at all.

On a forward P/E of 14, I see Mondi as a safe long-term investment.

Investment management

Thinking back over the financial crisis and the lacklustre performance of the FTSE 100 in the past five years, I’m drawn back to my thinking that investment management firms make for good long-term defensive purchases, even if they might be a bit volatile over the short term.

Schroders (LSE: SDR) is one I’ve largely overlooked, even though its shares have gained 35% over five years while the FTSE 100 has managed only 13.5%. Dividends have been modest with yields of around 3.4% and 3.6% expected for the next two years, but they’d be almost twice covered by forecast earnings.

The dividend is progressive too, growing from 58p per share in 2013 to 113p in 2017, and that’s obviously well ahead of inflation. In fact, for the long term, I’d rate a progressive and well-covered dividend above a higher current yield that’s more thinly covered.

The company’s latest quarterly update showed how things can fluctuate on such a short-term basis, and we heard that assets under management had declined by 2% in the quarter — and EPS is forecast to dip by the same 2% this year.

But that’s well within what I’d expect from simple changes in investor sentiment, especially in uncertain political and economic times.

Schroders shares are priced on a forward P/E of 14.9, which would drop to 14 based on the 5% EPS gain pencilled in for 2019. On that valuation I see Schroders as another defensive long-term investment if you can handle short-term dips.

And I see the 11% share price fall of the last three months as providing a buying opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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