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A cheap FTSE 100 growth-and-income stock I’d buy and hold for the next decade

You’d be hard pressed to think of a more mundane business than making cardboard boxes. But this is exactly what the fittingly dull-named DS Smith (LSE: SMDS) does. And it does it very well. Indeed, it’s a FTSE 100 firm and has a market capitalisation of over £6bn.

I believe DS Smith has considerable investment appeal. There are good drivers to continue increasing its earnings at a good clip in the coming years, and bright prospects of rising dividends from a decent starting yield at today’s share price.

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Meanwhile, food-on-the-go retailer Greggs (LSE: GRG) is doubtless a more familiar name, despite being in the second-tier FTSE 250 index, and having a market-cap at a sixth of that of DS Smith. The Greggs share price is up over 5% today, as I’m writing, after the company released a strong Q3 trading update. Could this be another stock with ‘goldilocks’ growth-and-income appeal?

Return to growth

Greggs shares dived on a profit warning back in May, with the unusually severe weather in March and April appearing largely responsible. My colleague Paul Summers saw this as an opportunity to buy into a well-run company at a depressed price. By the time of its half-year results in July, business was looking brighter, and today’s Q3 update confirmed continuing positive progress.

Total sales for the 13 weeks to 29 September increased 7.3%, bringing growth for the year to date up to 5.9%. Management’s profit guidance for the full year implies no advance on last year’s earnings per share (EPS) of 64.5p and dividend of 32.3p. This gives a price-to-earnings (P/E) ratio of 16.4 and a dividend yield of 3% at a current share price of 1,060p.

Earnings and dividend growth are set to resume in 2019, and with the company investing heavily in its supply chain and IT systems, the longer-term outlook is also good. That’s because it will have the capability to increase its shop capacity by over 30%. In this light, I don’t view the P/E of 16.4 as prohibitive. I’d happily buy the stock today in the expectation of good capital and income growth over the next decade.

The complete package

DS Smith looks to me an even stronger value proposition at a share price of 448p. City forecasts for its current financial year (ending 30 April 2019) of EPS of 37.8p, and a dividend of 16.7p, give a P/E of 11.9 and a yield of 3.7%.

The company’s focus on sustainable packaging in resilient and growing sectors, including fast-moving consumer goods, and especially e-commerce, provides a strong tailwind. Furthermore, I expect DS Smith’s growth to be juiced by two large strategic acquisitions. The $1.1bn purchase of US-based Interstate Resources last year is already delivering well ahead of initial expectations and I see similar potential for the €1.9bn acquisition of Spain’s Europac (a leading Western European integrated packaging business), which is due to complete by the end of this year, subject to regulatory approvals.

DS Smith has a strong track record of integrating acquisitions and with the current undemanding P/E, I rate the stock a ‘buy’. Again, as with Greggs, this is in the expectation of good growth in both capital and income over the next decade.

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G A Chester has no position in any of the 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.

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