I believe FTSE 100 incumbent Smurfit Kappa (LSE:SKG) is a stock that could boost my returns. Here’s why I’m considering adding the shares to my holdings.
Packaging business
As a quick reminder, Smurfit is a leading packaging firm and one of the largest paper-based packaging businesses in the world. Packaging demand has increased in recent times, especially since the pandemic, which coincided with the e-commerce boom.
So what’s the current state of play with Smurfit shares? Well, as I write, the shares are trading for 3,260p. At this time last year, the shares were trading for 3,750p, which is a 13% decline over a 12-month period.
I believe the stock market correction caused by geopolitical tensions and macroeconomic headwinds have driven down Smurfit shares in recent months.
A FTSE 100 stock with risks
Some of the aforementioned headwinds include soaring inflation and rising cost of raw materials. Some of these raw materials are vital cogs in Smurfit’s manufacturing process for its packaging products and solutions. The issue here is if it costs Smurfit more to produce, profit margins could be squeezed as well. If performance and profits are affected, investor returns and sentiment could be affected too.
The packaging market is very much a burgeoning one, due to the rise in demand led by the e-commerce boom mentioned earlier. There are other big competitors in this industry that will be vying for the same customers and business. One of these competitors is fellow FTSE 100 incumbent Mondi.
The bull case and my verdict
Let’s take a look at performance and fundamentals then. I do understand past performance is not a guarantee of the future, however. Looking back, I can see revenue has increased three out of the past four years between 2018 and 2021. 2020 levels dipped somewhat due to effects of the pandemic but 2021 results recovered strongly. The results were posted at the end of March for the period ending 31 December 2021. Smurfit reported growth in revenue, operating profit, and earnings per share as well as a dividend of 96.1 cents.
This leads me nicely on to my next point. Smurfit shares could boost my passive income stream. The shares currently hold a yield of 3.5%. This is pretty much in line with the FTSE 100 average of 3%-4%. It is worth noting that dividends can be cancelled, however.
What about the cost of Smurfit shares currently? Well, they look decent value for money to me at current levels. The market correction and headwinds have caused the shares to drop, and the shares are currently on a price-to-earnings ratio of 14. This is slightly lower than the FTSE 100 average of 15.
Overall I think Smurfit shares would be an excellent addition to my holdings. The shares currently look good value for money, pay a dividend to boost my passive income stream, and the business is continuing to grow performance and reputation as a world-leading packaging provider.
