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The 2 stocks I’m holding from the FTSE 100 and why

Most of my investments are in smaller firms than those occupying the FTSE 100, but the attractions of two stalwarts from the large-cap index were too tempting for me to ignore.

Ticking along nicely

The first situation I couldn’t pass by is the operational momentum and value on offer at paper and packaging firm Mondi (LSE: MNDI). The firm updated the market in February with full-year results and things are ticking along nicely. The headline figures show underlying earnings per share up 3% on a year ago, cash generated from operations lifting 10% and a return on capital employed running at 20.3%.

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In that great litmus test of director sentiment, they hiked the dividend by 10%, from which I infer that their thoughts are warm and positive about the immediate outlook. That’s encouraging because that’s how I feel too.

Chief executive David Hathorn said the firm is driving growth by investing capital into the business. Operating profit cranked up around €50m during 2016 and he expects a further €30m gain in 2017 resulting from capital investment projects. However, as well as a capital investment pipeline, Mondi is growing through acquisition and spent €185m acquiring four other businesses last year.

It’s hard to fault the operational progress it has achieved over the last few years and happily, that progress has translated into a steady move up in the share price, which I’m optimistic will continue. Even now, after such a long period of gains, the shares don’t seem to over-value the firm. At today’s share price around 1,874p, it trades on a forward price-to-earnings (P/E) ratio of just over 14 for 2018 and the forward dividend yield runs at 2.9%. City analysts following the firm expect forward earnings to cover the payout around 2.4 times.

With what I perceive as benign economic conditions around the world, I’m holding Mondi as a ‘steady comer’ in my portfolio.

Asset gains and a rising dividend

The other big-cap in my portfolio right now is 3i Group (LSE: III), the private equity firm that invests in smaller businesses and helps them grow.

I like the idea that by investing in big-cap 3i I get exposure to a portfolio of carefully chosen smaller firms without risking my capital on them directly. It uses its expertise and a network of professionals to guide its investee companies towards a step-change in growth, often supplying the capital needed to execute newly honed growth plans.

The company searches for businesses with enterprise values between €100m and €500m and aims to invest in the consumer, industrial, and business & technology sectors. Gains arrive when it is successful at pushing businesses onto a path of accelerating earnings improvements, often because of new expansion abroad. I reckon the best ways to measure its performance is to look at the firm’s net asset value (NAV) and what the directors are doing with the dividend.

The news is good. The dividend is showing a compound annual growth rate (CAGR) around 44% over the last five years or so and November’s half-year report showed a 19% gain in NAV compared to the year before. At today’s share price around 730p, the price-to-book value runs just above 1.32 and the dividend yield sits just above 3.1% for the year to March 2019, which doesn’t strike me as an excessive valuation. I think 3i looks set to deliver further NAV gains from here.

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Kevin Godbold owns shares in Mondi and 3I Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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