The Motley Fool

These FTSE 100 dividend hikers look too cheap to me

Shares in corrugated packaging firm DS Smith (LSE: SMDS) are down by a couple of percent today following the publication of a fairly brief trading update for the first quarter, scheduled to coincide with its annual general meeting. That’s despite management making making no change to its expectations for the financial performance of the company over the full year.

Although no actual numbers were provided in today’s statement — covering the period since the beginning of May — CEO Miles Roberts stated that demand for the company’s solutions remained strong and that “highly resilient” fast-moving consumer goods companies and e-commerce clients should allow the £5bn cap to achieve volume and market growth.

The standard reference to “macro-economic uncertainty” was given, but a commitment to reducing costs alongside new business wins in Europe and across the pond should help to pick up the slack from markets where the firm has noted a drop in demand, such as the export-focused, at-risk-of-recession GermanyIn other news, the integration of Europac — acquired last year — is progressing “very well” and the sale of the company’s Plastics division is expected to conclude before the end of 2019. 

Overall, it seems there’s little for those currently holding to be concerned about. For anyone looking to add the company to their portfolios, the stock was changing hands on a little over 9 times forecast FY20 earnings before trading commenced this morning. That’s cheap relative to the market as a whole and also very slightly cheaper than listed peers Mondi and Smurfit Kappa. In addition to this, DS Smith offers the highest yield of the three at 5%, covered over twice by profits. Importantly, the company also has an unbroken run of dividend hikes over the last decade — something I think investors should pay more attention to

Despite having lost a third of its value since this time last year, I continue to think the company is anything but a value trap and that the shares could be a great buy for the medium-to-long term once the current headwinds have abated.

Dependable dividends

But DS Smith isn’t the only top tier stock offering what appear to be sustainable dividend payments and trading at a decent valuation. Defence giant BAE Systems (LSE: BA) ticks the same boxes.

Similar to its FTSE 100 peer, BAE has established a reputation for hiking its cash returns every year. Sure, the odd 2%-3% isn’t anything for income aficionados to get particularly excited about, but a gradual increase is preferable to those firms yielding close to double-digit percentages that are ultimately forced to cut them. A potential 23p per share cash return leaves the stock yielding almost 4.2% at the current share price. 

Based on its most recent set of figures, there doesn’t seem any reason to think that these payouts are in danger. Back in July, the company estimated that FY underlying earnings per share growth would be somewhere in the mid-single-digits when compared to the 42.9p achieved in 2018. Higher costs incurred in H1 are also expected to be taken care of by lower tax rates and “improved operational performance“.

BAE’s valuation is hardly demanding either with the shares trading on a forward price-to-earnings (P/E) ratio of 12. That’s fairly average for the FTSE 100, but good within its sector and the company’s average valuation over the last five years (18).

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy 7% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit! Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”. Click here to claim your copy of this special report now — free of charge!

Paul Summers 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.