The DS Smith (LSE:SMDS) share price has been on a roll recently. Despite seeing significant declines in the early days of the pandemic, the company’s stock has steadily climbed by more than 25% over the past 12 months. But can it continue its upward trajectory throughout 2021 and beyond? If so, is it too late to add this stock to my portfolio?
The rising DS Smith share price
The 2020 pandemic caused an enormous level of disruption across many industries, especially for brick & mortar retail. Lockdown restrictions prevented non-essential stores from opening their doors to customers throughout last year. Consequently, e-commerce experienced a massive surge in popularity.
In fact, looking at the overall retail sales statistics for the UK, in May last year, online shopping represented 32.9% of total retail spending. And while there’s been some volatility in this proportion, it had risen to 36% by November – the highest level recorded to date. What does all this have to do with the DS Smith share price?
The business is one of the largest cardboard and packaging producers in the world. With e-commerce becoming a more prominent part of the shopping routine, the demand for packaging products from online businesses like Amazon has been rising at an accelerating pace.
DS Smith is certainly not the only player within this space. However, after disposing of its plastics division in February last year, the company has moved a step closer to its goal of producing 100% recyclable packaging by 2023. This actually offers the firm a slight competitive advantage that may enable the DS Smith share price to climb even higher over the long term. Let me explain why.
In the UK, businesses are charged additional tax based on the volume of packaging products they use. However, the rate charged is dependent on the type and quality of the packaging. In other words, the tax on 100% recyclable materials is much lower than non-recyclable alternatives.
Therefore, DS Smith customers will end up saving money as the company becomes more environmentally friendly. Not a bad trait to have when trying to attract additional customers.
The potential risks ahead
Like most manufacturers, DS Smith is highly susceptible to raw material costs. The price of paper and pulp has been on the rise for the better part of a decade. Recently, it’s experienced a bit of a surge that may begin to derail the firm’s consistent profit growth. After all, as production costs increase, profit margins get squeezed.
Furthermore, the balance sheet does carry a significant level of debt. Historically, the interest payments have been comfortably covered by operating income. However, should its profitability suffer, this leverage may threaten its ability to continue paying out a 4% dividend yield to shareholders. Needless to say, any cut to dividends would likely adversely impact the DS Smith share price.
The bottom line
The continued adoption of online shopping is further expanding the available market size in which DS Smith can prosper. And while there are undoubtedly risks involved, this business looks like it can continue delivering its consistent historical growth. Therefore, I think the DS Smith share price can continue to climb higher over the long term. So I’m considering adding some shares to my portfolio.
