UK value stocks appear to be making a long-awaited comeback. After years of underperformance, many value shares are climbing higher.
I don’t plan to load up on value stocks. That’s because many of these are cheap for a reason. That said, I do think there are some great opportunities in this area of the market at present. With that in mind, here’s a look at a UK value stock (in the FTSE 100 index) that I’d be happy to buy for my portfolio today.
A top FTSE 100 value stock
One of my top picks in the UK value space right now is DS Smith (LSE: SMDS). It’s a leading provider of sustainable packaging solutions that has a strong focus on the e-commerce and consumer goods industries. Generally speaking, packaging stocks tend to do well in an economic recovery. That’s because more economic activity typically translates to higher demand for packaging.
Momentum
DS Smith appears to have momentum right now. Last month, it said trading continues to “progress well” with the trends and momentum described in its H1 results on 10 December 2020 continuing into H2. It also said group like-for-like corrugated box volume growth had accelerated compared to Q2. It also noted it was seeing “encouraging signs of recovery” from industrial customers. This business momentum should support the share price in the near term.
A value stock with long-term growth potential
However, this isn’t just a short-term play. Having positioned itself as a key supplier to the e-commerce industry (Amazon is one of its major customers), DS Smith looks well-placed to benefit from the long-term growth of online shopping. This is an industry that looks set for powerful growth in the years ahead. I think this growth should provide decent tailwinds for the company.
Valuation and dividend yield
DS Smith’s valuation looks very reasonable, to my mind. Currently, City analysts expect the group to generate earnings per share (EPS) of 29.5p for the year ending 30 April 2022. This means the stock’s forward-looking price-to-earnings (P/E) ratio is about 14.4. I see that valuation as attractive. By contrast, the median forward-looking P/E ratio across the FTSE 100 index is about 16.8.
Meanwhile, the prospective dividend yield here looks attractive too. Currently, analysts expect a payout of 14.4p for next year. That equates to a yield of 3.4% at the current share price. That’s an excellent yield in the current low-interest-rate environment. But I’ll also point out that dividend forecasts aren’t always accurate.
Risks
There are risks to the investment case, of course. If the global economy doesn’t rebound as expected this year, the stock could fall. DS Smith also faces plenty of competition from rivals in the packaging space.
However, I’m comfortable with these risks. Overall, I think the long-term risk/reward proposition here is attractive. With economic activity picking up and analysts upgrading their earnings forecasts for the company, I think it’s a great time to buy this UK value stock.
