A Stocks and Shares ISA is a great vehicle for both medium-term and long-term investing. It allows all investments within the account to grow free from capital gains and income tax.
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Unsurprisingly, I have found the use of this type of ISA very appealing and consequently have looked for new shares to include. I tend to focus primarily on long-term investing, looking for good-value companies with strong fundamentals.
Compounding potential
Due to the typically longer duration nature of ISA-focused investments, I like to look for companies that pay a good dividend yield. I want companies that have paid this consistently for several years, along with growing it on an annual basis. The aim of this approach is that the beauty of compounding can take place within the ISA. This allows a significant return to accrue over the years.
The latest share I would consider including is Smurfit Kappa Group (LSE: SKG), a manufacturer of paper-based packing products. The company operates primarily in the UK and Europe, with separate packaging and paper business segments. Smurfit has experienced interesting share price movements over the last few years, rising 17.7% in 2020 and 18.1% in 2021.
Despite these share price gains, the company has struggled this year, falling almost 31% so far in 2022. As a result, the price-to-earnings (P/E) ratio has now fallen to 11.9 and is forecast to fall further to 8.2 by next year. This certainly creates appeal from a value perspective, in my view. The company is reaching a level that is a lot closer to typical value investments.
Underlying fundamentals
The underlying fundamentals are also attractive, with considerable forecast earnings growth, and decent profit margins. The company has achieved a reasonable level of earnings generation on invested capital, which is a key metric for assessing a company’s quality.
Furthermore, Smurfit has now recovered from a dip in turnover during 2020. The top-level earnings have now exceeded pre-pandemic levels, and are the highest on record. I think this consistent earning potential pre-pandemic, followed by a quick recovery in 2021, is a positive sign.
Consistent dividend yield
When looking for a company to include in my Stocks and Shares ISA, I want to find a fair dividend that has been paid consistently. This is certainly the case with Smurfit Kappa Group. The company is currently paying a yield of 3.9%, which is in line with the index average.
Furthermore, this dividend has been paid consistently for the last 11 years and has grown each year for the last 10. The yield is forecast to hit 4.4% next year, and is likely to continue growing. This is due to the aforementioned consistent earning generation which is essential for dividend payment.
Underlying weaknesses
The company does have slightly higher debt levels than I would like. Current levels are almost 45% of market capitalisation. Free cash flow generation has also fallen significantly, now just 40.6%. This is considerably below the company’s three-year average of 84.3%.
Nonetheless, I still believe that the company represents a good long-term investment opportunity. In my opinion, Smurfit is a high-quality company that is now trading at a discount. I would be keen to add this company to my Stocks and Shares ISA once I gather the funds.
