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Why did the market mark down this attractive FTSE 100 name? I’d buy!

I’ve been keen on the FTSE 100’s Smurfit Kappa Group  (LSE: SKG) for some time, so couldn’t believe my luck when the fickle stock market sent the shares plunging last year in the big sell-off.

The paper-based packaging provider has a lot of defensive characteristics and an awesome record of raising its dividend, which is up more than 230% over the past six years. And there’s been strong support for those dividend payments from robust-looking cash inflow, which has been rising a bit each year. Earnings have been well covered by that torrent of cash. The business looks strong to me, and that makes it a decent candidate for my income portfolio.

Out with the bathwater

Yet the share price plunged more than 40% between the end of August 2018 and mid-December in what is starting to look like a baby-out-with-the-bathwater move. Indeed, the firm posted some impressive financial figures with its full-year results today, and the shares have been clawing their way back up since the beginning of the year – and rightly so.

The share price sits at 2,342p as I write, and it’s looking perky today on the news. At that level, the price-to-earnings ratio runs just above nine and the dividend yield at about 3.7%, which I think is attractive given the firm’s long history of moving its dividend payment higher each year.

If the market was expecting a cyclical slowdown from Smurfit Kappa, it will be surprised by how upbeat today’s report is. The company’s worldwide operations delivered a 4% increase in revenue during 2018 with an underlying rise of 7%. Free cash flow shot up 61% and adjusted earnings per share moved 58% higher. The directors expressed their confidence in the outlook by pushing up the final dividend for the year by 12%.

There’s been a good showing on quality metrics for a long time, and the return-on-capital figure improved even further in the period, rising from 15% up to more than 19%. One slightly negative figure is that net debt moved 11% higher to €3,122m. However, that could have been affected by significant” acquisition activity, which saw the company acquire businesses in France, the Netherlands and Serbia.

A positive outlook

Chief executive Tony Smurfit explained in the report that the firm has been transforming itself in “recent years” and delivering “progressively superior returns.” I think there’s proof of that in today’s figures. Looking forward, Mr Smurfit said he is “always conscious of macro-economic risk,” but he believes the company is “well positioned to capitalise on industry opportunities.”  

There’s no sign of any weakness in trading and I see the fallen share price now as an opportunity to buy into that rising dividend at a reasonable price. The firm is expanding and I’d be happy to hold the shares with a long-term investing horizon in mind. 

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.