Here’s why I’d buy falling shares in this FTSE 100 stock!

Jabran Khan details a FTSE 100 stock that has seen its shares drop recently. He explains why he would still add shares despite the recent drop.

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FTSE 100 stalwart DS Smith (LSE:SMDS) has seen its shares fall recently. Despite this, I would still add the shares to my holdings. Here’s why.

Macroeconomic pressures

DS Smith is recognised as one of the world’s leading packaging, recycling and promotional items solutions providers. Its operations span over 34 countries supported by approximately 30,000 employees. Some of its customer base include giants like Amazon and fellow FTSE 100 powerhouse Unilever.

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So what’s happening with the DS Smith share price? Well, as I write, the shares are trading for 390p. In September 2021, shares reached 461p. I believe the 15% drop in share price can be attributed towards macroeconomic pressures out of DS Smith’s control. Rising costs, including that of raw materials, coupled with supply chain issues and a shortage of HGV drivers here in the UK market have hampered the shares in recent months.

FTSE 100 stocks have risks

I must note two risks of investing in DS Smith. Firstly, the macroeconomic issues noted above may continue long enough to have a real effect on performance, financials and shareholder returns. It is worth mentioning other FTSE 100 stocks have suffered due to the issues mentioned. Second, DS Smith’s debt levels could be considered a bit high. They don’t concern me longer term as the business is performing well enough to pay these debts down.

Why I’d buy the shares

Despite DS Smith’s recent share price dip and risks mentioned, I’d still add the shares to my portfolio.

Firstly, recent and historic performance has been excellent. I do understand past performance is not a guarantee of any future earnings. A half year report released in December for the six months to 31 October 2021 made for excellent reading. Revenue and profit were both up compared to the same period last year. The balance sheet was healthy and DS Smith also performed well enough to declare a dividend of 4.8p per share. This is a 20% increase from last year’s interim dividend.

Next, DS Smith’s position as a leader in its respective market gives me confidence I would see a positive return on my investment. As one of the bigger players, it also has good pricing power. This was another point mentioned in its recent report. This power was able to help it offset some worries of rising costs, also mentioned earlier. In turn, the results posted were positive including excellent profit after tax levels. In addition to this, DS Smith has made a recent commitment to cut its carbon footprint. This will go down well with ethical investing enthusiasts and help investor sentiment over the longer term.

DS Smith is a good dividend payer. Dividends help me make a passive income for my portfolio. As I write, DS Smith’s dividend yield stands at 3.5%. The FTSE 100 consensus average is approximately between 3%-4%. The yield may be average but it is paid consistently, not all firms on the index can attest to this feat. Dividends can be cancelled, of course.

Overall I think DS Smith shares would be a good addition to my portfolio. The falling share price has made them a cheaper buy for my holdings at current levels. Recent macroeconomic challenges won’t be a longstanding issue in my opinion and the shares should climb upwards once more.

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Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended DS Smith 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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