The latest numbers on the economy are dismal. In 2020, the UK reported an almost 10% drop in gross domestic product (GDP) on account of the lockdowns it saw for much of the year. But I’m not letting the big picture faze me. Despite the challenges faced by some industries, there are some UK shares on which I think fortune is shining.
One example is the FTSE 100 paper and packaging provider Smurfit Kappa (LSE: SKG), which just increased its dividends. It has also paid the government back for the support taken during the pandemic. This should come as no surprise.
Online sales boom drives packaging demand
In a year when online sales have boomed, the demand for linked sectors has increased as well. The packaging industry is one of them. Interestingly, it’s otherwise a cyclical industry, which means that it should boom when growth is on the rise and come off in slowdowns.
But the Covid-19-driven slowdown has been a very particular one. It has not just impacted the industry in a limited way, it has improved prospects for online sales and packaging as well.
UK shares benefit
This is becoming apparent across the sector. Ocado, the online grocer, refers to a survey in this regard in its latest results. According to that survey, 7 in 10 first-time online shoppers in the US are likely to continue shopping online.
Other packaging companies are clearly anticipating this, as evident from their expansion plans. For instance, DS Smith, the FTSE 100 company that provides cardboard boxes to consumer goods biggies like Unilever and Amazon, is planning packaging plants in Italy and Poland. Similarly, Mondi, another FTSE 100 company in the sector, acquired a Turkish corrugated packaging company in January this year.
Tony Smurfit, SKG’s CEO, also acknowledges this in his statement released along with the earnings report. He says, “Driven by strong secular trends such as e-commerce and sustainability, the outlook for our industry is increasingly positive”.
He further adds that it’s this confidence that drives the increase in dividends. To be sure, SKG isn’t the best income stock around. It has a dividend yield of just 2.8%. But that needs to be seen in context. SKG’s a growth stock that has seen an impressive share price increase in the past few years. Its share price has risen over 20% in the last year alone. A non-negligible and growing dividend for the stock is something to note then.
Risks to SmurfitKappa
I’ve long been bullish on SKG, and now I’m even more so. But, that doesn’t mean that there are no risks to the stock. Despite all the buoyancy in the sector, its revenue growth has been dented. Its earnings picture is a bit more mixed, with a reduction in operating profit but increase in basic earnings per share. So I’ll be keeping an eye out for developments in its financials.
Also, it’s possible that growth in online sales does slow down as lockdowns ease. People may jump at the chance to shop in stores again. To put it another way, the short-term potential may have been over-estimated.
Over the long-term though, I think the winds are blowing in its favour. I’m optimistic about the share.