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A growth stock for the long term with +25% pa returns

If you had £1,000 and invested this sum at a rate of 5% per annum, after 10 years your initial investment would be worth £1,628. However, if you take the same £1,000 and invest it at a rate of 25% per annum, at the end of the decade, the initial investment would be worth £9,313 a total return of 831%. If given a chance, you would choose the investment that achieves the return of 25% per year. Unfortunately, such investments are almost impossible to find, although they are out there.

DS Smith (LSE: SMDS) is one such rare bird. Over the past five years, shares in the company have returned 28.5% per annum including dividends giving a total return of 250%. For some comparison, over the same period, the FTSE 100 has only returned 33.3%.

And today shares in DS are charging higher after the company published its fiscal full year results and announced a game-changing acquisition.

Rapid growth 

According to today’s numbers, for the 12 months to 30 April 2017, DS’s revenue expanded by 18% including currency gains, and at constant currency revenue grew by 6%. Adjusted profit before tax increased 6% year-on-year and adjusted earnings per share rose 19%, including currency fluctuations, to 32.5p. Off the back of this positive performance, management declared a 19% increase in the company’s dividend payout to 15.2p.

Alongside these results, DS also announced today that it is paying £72m to acquire 80% of Interstate Resources, a family-owned integrated packaging and paper producer concentrated on the East Coast of the US. To fund part of the deal DS is undertaking a placing to raise £285m before expenses, which is equal to around 7% of the firm’s current market value. It is believed that the acquisition will be immediately earnings accretive, so it shouldn’t be long before shareholders start to see improved returns.

Shareholders will be rewarded

Based on today’s numbers and acquisition news, it does not look as if DS’s impressive shareholder returns will come to an end any time soon. 

City analysts had been expecting 6% earnings growth for the financial year ending 30 April 2018. As of yet, these figures haven’t been updated to reflect the acquisition news, so it looks as if these forecasts are out of date. 

If we assume earnings growth doubles to 12% next year, the shares look cheap at current prices considering the historical returns. Specifically, if earnings per share hit 35.3p next year, up 12% year-on-year, shares in DS currently trade at a forward P/E of 13.5, around the five-year average. At the same time, the company also supports a dividend yield of 3.4%.

The bottom line

So overall, DS is growing rapidly, and the company should continue to generate impressive returns for shareholders in the years ahead. What’s more, the shares trade at a relatively attractive valuation and support a market average dividend yield. The company’s management has proved that it can generate shareholder returns over the past five years and investors are likely to be disappointed as the company continues on its growth trajectory.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.