Maybe I’m just a lazy investor, but I find I can sleep easier when I’m not worrying about whether I should sell any of my stocks. Indeed, as my investment approach has evolved over the years, I’ve found myself selling less and less often. And it feels good.
The hard part with this approach is picking the right type of stocks. I need to buy shares in businesses I’m confident can continue to grow and remain profitable for many years to come.
Today, I want to look at a good example of the kind of share I like to buy.
A strong performance
FTSE 100 cardboard packaging specialist DS Smith (LSE: SMDS) is a relatively new investment for me, as I only bought the shares earlier this year. But I’ve been following the stock for a while and believe there’s a good long-term story here.
Figures released today show that the company’s steady growth continued last year. Sales rose 12% to £6,171m during the year to 30 April, while pre-tax profit climbed 35% to £340m.
Although impressive, these figures do need a little explanation. Last year’s strong growth was boosted by contributions from two big acquisitions, in Spain and the US. I don’t expect this kind of profit growth every year, but I was encouraged to see management now expects to make €70m of cost savings by integrating the Europac business in Spain, compared to previous forecasts of €50m. The firm’s US acquisitions are also said to be performing “ahead of plan”, with cost saving of $33m to date.
Profitability also remains good, with a return on average capital employed of 13.6%. This indicates the firm generated an operating profit of £136m for each £1,000 invested in the business.
Debt remains a little high for comfort, at £2,227m. But the group should receive £400m in cash from the sale of its plastics division later this year. Once this is factored in, I think the situation will look more comfortable.
Pushback on plastic could boost growth
Having been through a period of change, DS Smith’s management now appears to be focused on integrating and streamlining the business.
The group’s focus on packaging for consumer and industrial goods gives it a broad range of customers and although volumes could suffer in a recession, I believe the group’s increased scale should help support stable long-term demand.
One area that’s been singled out for growth is the market for cardboard alternatives to replace plastic packaging on consumer goods. All of the group’s packaging products are recyclable, so score more highly for sustainability than plastic alternatives.
A number of high profile food and drink companies have recently announced a shift away from plastic packaging — DS Smith’s products are helping to make this possible.
The shares are up by more than 5% at the time of writing. That puts SMDS stock on about 10 times 2020 forecast earnings, with a 5% dividend yield. I continue to rate the shares as a buy at this level.
