Have £3k to invest? One FTSE 100 dividend stock I’d buy for the next 10 years

This FTSE 100 (INDEXFTSE:UKX) stock has been unfairly punished in the market sell off, says Roland Head.

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If you’ve got fresh money to invest in stocks, then the stock market sell-off we’ve seen over the last couple of months could be good news. For long-term investors, I believe there’s more value on offer today than we’ve seen for a while.

Today I want to look at two potential buys.

Packing a profit

The online retail market is growing fast. But which companies take a slice of profit out of every single internet sale? Payment processors and packaging firms.

In my view, the packaging sector in particular offers some attractive opportunities at the moment. Alongside the growing demand from internet retailers, supermarkets and industrial firms also require increasingly sophisticated packaging. This minimises waste and labour-intensive unpacking operations.

The top pick in this sector?

FTSE 100 group Mondi (LSE: MNDI) has fallen by more than 20% over the last three months, but I can’t see any reason to turn bearish on this business.

Half-year results in August showed that pre-tax profit rose by 6% to €490m during the six months to 30 June. Cash generation has also improved and an update in October confirmed that the group continues to benefit from “stable pricing” in the cardboard market.

City analysts have upgraded their earnings forecasts for the firm several times over the last year. This suggests that Mondi is performing better than expected. Despite this, the shares now trade on just 10 times forecast earnings and offer a 3.8% dividend yield. I rate the stock as a buy at this level.

An under-the-radar buy?

Another company that’s consistently performed better than expected over the last year is outsourcing specialist Serco Group (LSE: SRP). Back in September, the company upgraded its guidance for 2018, saying that a number of one-off items would boost profits.

An update on Thursday confirmed this outlook and painted a brighter picture for 2019. The acquisition of selected healthcare facilities contracts from failed firm Carillion should add to the group’s profits next year and allow the company to generate further profit growth in 2019.

At the time of writing, Serco’s share price was up by 9% at 98p as investors cheered the progress being made by turnaround boss Rupert Soames.

Long-term opportunity

I have to admit that outsourcing — which tends to have low profit margins — is not my favourite sector to invest in. But I do have a high regard for Mr Soames and the progress he has made so far.

Unlike some rivals, Serco’s debt is firmly under control. Year-end net debt is expected to be “around £200m”, giving the firm a leverage multiple of just 1.2-1.3 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Mr Soames has managed to ditch some loss-making and troublesome contracts, in order to focus on more profitable operations. Although it’s early days, the firm’s underlying operating margin rose to 2.8% during the first half of this year, compared to 2.3% for the same period last year.

With a 2018 forecast price/earnings ratio of 19, Serco shares don’t look obviously cheap. There’s also no dividend at the moment. But I think that the hardest part of this turnaround is now over. Profits could now start to rise steadily. In my view, this could be a profitable share to tuck away for the long haul.

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 assessed. Consider taking independent financial advice.

Roland Head 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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