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Have £2k to spend? Another FTSE 100 dividend stock I’d buy before the market wises up

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Screen of various price trends, possibly in FTSE 100
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In a recent article I ran the rule over Ferguson and explained why, despite the evaporation in investor interest of late, the FTSE 100 business remains in great shape to deliver stunning returns in the years ahead.

In fact, I argued that now it is a great contrarian buy given that heavy selling activity during late 2018 leaves it dealing on a scandalously low valuation.

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Now fellow Footsie share DS Smith (LSE: SMDS) may have sold off for a different reason — in this case reflecting concerns over rising supply from Chinese containerboard producers — but I am confident that the boxmaker also has what it takes to generate brilliant profits growth in the years ahead, and this also makes it a brilliant cut-price stock to purchase.

The competition may have upped the ante, but DS Smith’s prospective P/E ratio of 8.6x suggests that the market is far too pessimistic about the situation.

As I’ve argued before, by rampantly expanding its presence in the emerging economies of central and Eastern Europe, and more recently entering the US marketplace through acquisition activity in 2017, it’s in increasingly great shape to ride the positive long-term retail trends in these markets.

Falsely spooked?

Besides, a recent report from Jefferies suggests that the brutal share price dives of DS Smith and its London-listed peers like Mondi of late may have been far too severe.

The financial services company said that anticipated falls in containerboard prices in response to those aforementioned capacity increases may not in reality turn out to be as shocking as the investment community is anticipating. A sharp re-rating of share prices across the sector could be just around the corner as signs are growing that this belief could be gathering steam. And particularly given the low, low earnings multiples of the likes of DS Smith.

In the meantime I’m expecting DS Smith to keep on peppering the market with positive trading updates. The FTSE 100 firm was at it again a month ago when it advised that revenues at constant currencies streamed 16% higher in the six months to October to £3.07bn, a result that pushed pre-tax profit 28% higher on a comparable basis to £162m.

Yields leap to 5.7%

City analysts believe that the packaging play has what it takes to keep delivering juicy profits improvements for the foreseeable future, and rises of 8% and 9% are currently forecast for the years to April 2019 and 2020 respectively.

And so the number crunchers are predicting that dividends will continue rising at a terrific rate too, their confidence no doubt boosted by DS Smith’s December decision to hike the interim payment 14% year-on-year to 5.2p per share.

Right now a total dividend of 16.1p per share is expected for this year, up from 14.7p last year and yielding a terrific 5.3%. And next year a 17.3p estimated dividend shoves the yield to an even better 5.7%.

I bought into DS Smith towards the back end of last year on the back of its bright growth and income potential, and although my timing could have in retrospect proven better, I’m still very happy to have the company sitting in my shares portfolio. In fact, at current prices, I’m tempted to nip in and grab some more.

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Royston Wild owns shares of DS Smith. The Motley Fool UK has recommended DS Smith. 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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