Due to market volatility, many FTSE 100 stocks have fallen in price. This has led me to look to bolster my holdings with quality stocks. One pick I like the look of is DS Smith (LSE: SMDS). Here’s why.
Packaging giant
DS Smith is an international packaging business and the UK’s leading producer of recycled paper board and corrugated packaging. It also manufactures plastic packaging. In addition to its enviable position in the UK, it also has an established presence throughout Europe.
Due to macroeconomic factors such as soaring inflation and rising interest rates, many FTSE 100 stocks have been pushed down. This includes DS Smith, although over a 12-month period the shares are up.
As I write, DS Smith shares are trading for 302p. At this time last year, they were trading for 288p, which is a 4% increase. However, since February, the shares are down 17% to current levels. Back in February, the shares were trading for 368p.
To buy or not to buy?
Let’s start with the bull case. DS Smith is in an enviable position in that its products are in high demand, generally speaking. Packaging has become a coveted commodity in recent years due to the e-commerce boom.
With that in mind, DS Smith’s recent results show good levels of performance and growth too. Looking back, I can see it has grown revenue in the past three fiscal years, and it has grown profit levels in two of this years too. However, I am conscious that past performance is not a guarantee of the future.
Moving on, DS Smith shares look cheap at current levels with a price-to-earnings ratio of just over eight. This is lower than the FTSE 100 average. In addition to this, the shares would boost my passive income through dividends. The dividend yield at present is 9%, which is above the index average. I do understand that dividends are never guaranteed and can be cancelled by the business at any time.
Looking at the bear case, DS Smith could experience some shorter-term issues due to falling spending within the online shopping sector. This is linked to a gloomy economic outlook and the cost-of-living crisis. Less packaging is required if people aren’t spending as much. I do view this as a short-term issue and since I always look to invest for the long term, I’m not too worried here.
Finally, I would like to keep an eye on is the rising cost of raw materials, as well as manufacturing costs. These issues could squeeze profit margins and affect any investor sentiment and returns too.
A FTSE 100 stock I’d buy
Overall I believe DS Smith shares look like a great opportunity right now. I would be willing to buy some shares as soon as I have the spare cash to do so.
I believe DS Smith’s established position in the market and rising demand for products should enable steady growth for years to come. When you add to this the current share price and passive income opportunity, it looks like a great prospect to me.
