DS Smith (LSE: SMDS) is a packaging company. And I reckon it’s a top FTSE 100 stock to buy now with £1,000.
The directors reckon the fibre-based business is set to expand serving the fast-moving consumer goods (FMCG) and e-commerce sectors. And I think it seems likely products such as cardboard and paper packaging will remain in high demand in today’s world.
The long-term drivers in the packaging market include rising demand generally, and a shift away from non-recyclable materials. And DS Smith reckons it has the “scale and expertise to deliver for multinational consumer companies.”
Recovering fast from the pandemic
After taking a dent in its trading figures when the pandemic hit last year, the business has since been recovering well. The current trading year started on 1 May and has been strong, continuing the “volume momentum” of the final quarter of the trading year to 30 April.
However, the business is being challenged by rising input costs. Lots of things have been going up in price, such as old corrugated cases, energy, transport and labour. But the directors expect to fully recover those increasing costs by raising selling prices. When that happens, I reckon DS Smith has every chance of maintaining its profit margins.
And City analysts are optimistic. They’ve pencilled in a strong recovery in earnings of almost 65% for the current trading year to April 2022. And they expect a further uplift of around 15% the following year.
Chief executive Miles Roberts is upbeat about the company’s forward-looking prospects. He said in June’s full-year results, growth in the market for e-commerce and plastic-free packaging has “accelerated” over the last 12 months. Demand for the company’s output is “strong” and Roberts expects the business to make “good progress” this year.
Why I reckon it’s a FTSE 100 stock to buy now
And I reckon DS Smith is a top FTSE 100 stock to buy now because of the mix of decent forward-looking growth prospects set against a fair valuation. With the share price near 440p, the forward-looking price-to-earnings rating is just below 13 for the trading year to April 2023. And the anticipated dividend yield is around 3.7%.
DS Smith has a good record of rewarding shareholders with chunky dividend increases to reflect the operational progress of the business. And City analysts predict double-digit percentage increases in the shareholder payment ahead.
However, as with all shares, there are risks. The share price plunged a long way at the beginning of the pandemic. And I think that demonstrates how sensitive the business is to changes in the market. If the company falls short of earnings expectations in the future, the share price will probably fall and I could lose money on the stock.
Nevertheless, for me, DS Smith is a top FTSE 100 stock to buy now. And I’d embrace the uncertainties and risks and invest £1,000 to add some of the shares to my long-term diversified portfolio.
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Kevin Godbold 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.