The DS Smith (LSE: SMDS) share price is off to a good start in 2024. And FY results on 20 June gave it an extra nudge, even though they showed falling profits.
But despite a volatile time, we’re still looking at no real change over the past five years.
We see a modest valuation here, with dividend yields above 5% and growing. And forecast earnings growth could mean a forward price-to-earnings (P/E) ratio of 13 could turn out to be cheap.
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Tough year
The firm makes packaging materials, using paper and card, including recycled materials. And we’ve had a year when inflation has kept people away from spending and from needing things to be delivered.
Things are very different now from the Covid days. Back then, soaring e-commerce demand pushed up a lot of stock prices of those involved. And a comedown had to have been inevitable.
Still, DS Smith, supplying the packaging rather than shipping the goods themselves, hasn’t suffered as badly as, say, Ocado.
Improving outlook
All in all, the 17% revenue fall reported for the year ended April 2024 doesn’t worry me. Nor does the 23% dip in adjusted earnings per share (EPS).
CEO Miles Roberts described it as “a robust performance, despite the challenging environment.“
He added that “positive trends in packaging volumes from the second half of last year have continued into the current financial year,” and he expects higher demand to lead to better pricing. Input costs should be higher too, though.
Debt
While I’m generally buoyed by all this, the company’s debt situation does concern me.
After a few one-off cash outflows, DS Smith saw net debt rise to £2,230m at 30 April. That’s 36% higher than the previous year’s £1,636m.
It means the net debt/EBITDA ratio has now climbed to 2.1 times, well up from 1.3 times the year before. And I don’t like that.
Dividends
But, it has been an unusually tough year. And the firm did pay £103m for the outstanding shares in Interstate Resources that it didn’t already hold.
I want to see that debt coming down in the next year, though. And I think I might hold off on any plans to buy the stock until I see how the current year is progressing.
The dividend still looks good, mind, held at the same 18p per share as last year. We heard that the board “considers the dividend to be an extremely important component of shareholder returns.” I should hope so, yes.
Cash cow
Investors appear to be looking for growth these days as confidence returns. It’s all about tech, and if there’s no AI involved then nobody seems to care that much.
DS Smith is nothing like that at all. It sells dull and boring products in a dull and boring market, used for dull and boring purposes. Refreshingly dull and boring, I should say.
That business has been bringing in bags of cash for years. And I’d rather have 5% dividends today than jam tomorrow.
