FTSE 100 stocks have been under severe pressure during the past week. Yet the fall in London’s premier share index pales in comparison to the sharp decline in DS Smith’s (LSE:SMDS) share price.
The packaging manufacturer sank to eight-month lows following the release of full-year financials on Thursday. Over the course of the trading week, it lost a whopping 12% of its value.
I consider this to be an excellent dip opportunity, especially for those seeking to supercharge their passive income.
Today, DS Smith shares carry a 6.8% forward dividend yield, far ahead of the 3.7% average for FTSE shares. Here’s why I think the blue-chip company is such a bargain.
Impressive trading
So what was so chilling about last week’s market update? In my view as an existing shareholder: not a lot.
Okay, like-for-like volumes dropped 5.8% during the 12 months to April 2023 as conditions in its end markets worsened. But revenues still rose 14%, to £8.2bn, while adjusted operating profit leapt 40% to £861m.
This, in turn, prompted DS Smith to hike the full-year dividend 20%, to 18p per share.
Strong pricing momentum, allied with effective cost-cutting programmes, have allowed it to keep growing profits in spite of lower volumes and elevated input costs. The firm’s margins (as measured by return on sales) increased to 10.5% over the year from 8.5% in financial 2022.
This is not all. DS Smith’s ability to gain market share has helped keep volumes at healthy levels. It said that
Our strong customer relationships and focus on quality and service enabled us to gain market share with the more resilient fast moving consumer goods (FMCG) and other consumer related sectors, now representing 84% of our volumes.
Reasons to invest
Looking ahead, DS Smith may struggle to keep growing profits in the current climate. Analysts at Hargreaves Lansdown comment that box demand “is likely to continue to remain under pressure as consumers take stock of soaring living costs and pull back on some of their online shopping”.
But I think recent falls in DS Smith’s share price greatly overestimate the scale of the challenge. This is particularly the case in the wake of those ultra-resilient trading numbers released last week. Today the company trades on a forward price-to-earnings (P/E) ratio of 7.1 times. This is well below a corresponding average of 14.5 times for FTSE 100 shares.
In fact that low earnings multiple, along with that market-busting, 6%-plus dividend yield, makes the company one of the best-value FTSE shares in my book.
This is a UK blue-chip share I plan to hold for the long haul. I love its winning commitment to innovation and pledge to keep growing the business through acquisitions. I also like its decision to double-down on sustainability as well as product development for online retailers. These steps could supercharge profits over the next decade.
As Hargreaves Lansdown also comments: “consumers are keen to shift away from plastic packaging, and reliance on e-commerce is a trend that’s here to stay”.
