Here’s a FTSE 100 stock forging an ESG-focused future

DS Smith (LON:SMDS) is a FTSE 100 stock with a competitive edge. Its share price soared last year but can it continue as environmental pressures grow.

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Multinational packaging business DS Smith (LSE:SMDS) thrived in the pandemic as e-commerce sales soared. That’s because the company makes much of the cardboard packaging online orders are delivered in. The DS Smith share price is up 26% in the past year, but it’s been fluctuating this past week. Will the pressure to meet ESG targets reduce the appeal of this FTSE 100 stock as a long-term investment?

Environmental concerns

Pressure is mounting on FTSE 100 businesses to cut carbon emissions. So DS Smith is investing in energy-efficient technologies and switching to cleaner fuels. It’s already achieved ISO 50001 certification, which will help it reduce its CO2  emissions by 30% per tonne by 2030.

Its paper mill in Croatia recently switched to green energy, which is projected to reduce its CO2 emissions there by 23% annually.

There’s also the likelihood of rising consumer pressure for more eco-friendly packaging options, which could be expensive. But it’s aware of this and has launched a mission to solve eco problems, including replacing plastics in its packaging. And it’s a global partner with the Ellen MacArthur Foundation, boosting its reuse and recycling focus.

A FTSE 100 takeover target

In March, rival packaging company Mondi was rumoured to be considering a takeover of DS Smith, but nothing came of it. However, it remains an attractive potential target.

When billionaire Warren Buffett refers to a company’s economic moat, he means its competitive advantage. I think DS Smith has this as the scale of its manufacturing and distribution network is impressive. Thanks to years of investment, it solves many of the challenges present in the e-commerce supply chain. This may well present a valuable addition to a growing business.

Even without any takeover bids on the table, I think the company offers value. Yet there are some concerns.

At the moment, manufacturing its paper means buying the raw materials cheaply when the market is down. But paper production becomes expensive when the price of raw materials rises.

This past year has seen a commodity boom, and rising costs are hurting its profit margins.

In its just-released full-year results, it said pre-tax profit to April 30, fell 38% to £231m year-on-year, and revenue dropped 1% to £5.98bn. Meanwhile, adjusted operating profit fell 24% to £502m. Covid-19 and inflation risks continue to present challenges. Higher costs of packaging, energy, transport and labour all contributed to recent losses.

Would I buy DS Smith shares?

Analyst targets for the DS Smith share price fall between 330p and 509p. At 421p, it’s currently at the halfway mark. Its market cap is £5.7bn, its price-to-earnings ratio is 29, with a forward P/E of 15, and earnings per share are 24p.

It’s also a FTSE 100 constituent, so it’s well-established and has a credible reputation. Today, the company confirmed a final dividend. Added to its interim dividend, this makes for a 2.8% yield on today’s share price. The dividend is also covered by 2 to 2.5 times earnings. Of course, if pandemic conditions worsen, then the dividend may be at risk of another cut.

Nevertheless, DS Smith is a packaging company, and packaging is in high demand. E-commerce is on the rise, and I don’t see that slowing any time soon. DS Smith counts companies such as Unilever, Danone, Diageo, and PepsiCo as clients, which are all quality international brands. I’d consider adding this FTSE 100 stock to my Stocks and Shares ISA.

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.

Kirsteen owns shares of Unilever. The Motley Fool UK has recommended DS Smith, Diageo, and Unilever. 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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