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Another FTSE 100 dividend stock I think investors are underestimating

Earlier this week I was singing the praises of Taylor Wimpey and explaining why, given the painful sell-off of recent weeks, I think it is such a great share to load up on today (a quick recap: its dividend yields of close to 12%).

Now DS Smith (LSE: SMDS) may not be packing yields anywhere close to those of the homebuilder — the forward reading sits at 5.2% right now — but I believe it’s also a terrific FTSE 100 income stock to load up on too.

Why? Well, while falling short of Taylor Wimpey, yields here still outstrip that of the broader 4.5% prospective average for the Footsie.

Another robust year

Sentiment for DS Smith remains largely soggy, despite its ability to keep growing sales at a terrific rate. Indeed, after the share price spike which greeted the release of full-year results last week — a release in which the firm announced a 12% revenues increase in the last fiscal year — investors have been minded to sell sharply again in more recent days. And I find this most baffling.

Ongoing efforts to build its range of paper and packaging solutions through organic investment and acquisitions is allowing it to grow ahead of the broader market, and consequently sales continue to rise, despite toughening economic conditions in some marketplaces. In fact, organic volumes at DS Smith rose 2.4% in the 12 months to April 2019 as shipments rose across all of its territories.

On top of this, its orientation towards fast-moving consumer goods (FMCG) companies, a bias which has been reinforced by those aforementioned steps to improve the breadth of its operations and product ranges, resulted in another hardy sales performance last year.

The broad geographic footprint of FMCG specialists, and the immense popularity of their brands, help them to weather tough conditions in one or two trading territories and to keep volumes moving higher. And of course, this filters through to benefit the likes of DS Smith. It’s why City analysts expect earnings at the Footsie firm to rise an extra 8% in fiscal 2020.

Paper tiger

It’s not that market makers are wrong to be more wary of DS Smith (like its blue-chip rivals like Mondi and Smurfit Kappa) as Chinese producers expand production over the next few years. I would argue, though, that they are underestimating the company’s strong market position in emerging and mature markets across Europe, its growing role in sustainable packaging (which recently saw it hive off its plastics operations), an increased focus on the rapidly-growing e-commerce segment, and consequently its exceptional long-term profits outlook.

Besides, I would argue that a forward P/E ratio of 8.2 times, a figure that sits comfortably inside the bargain-basement milestone of 10 times and below, more than factors in the possibility that extra production might dent sales growth further down the line. In summary, I think DS Smith is a top pick for both growth and dividend hunters at this moment in time, and particularly so at current prices.

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Royston Wild owns shares of DS Smith. 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.