With a 7.1% yield, what’s going on with this overlooked FTSE 100 dividend stock?

Think of where to find high-yield dividend stocks in the blue-chip FTSE 100 index of leading shares and attention often turns to the financial services sector. Firms like M&G and Legal & General are known for their juicy dividend yields.

One area that may not come to mind so fast is packaging. But packaging company Mondi (LSE: MNDI) currently offers a 7.1% yield.

Could this be a dividend stock for income-focussed investors to consider?

Long-term share price decline

Looking at the past few years, it can become clearer why the Mondi dividend yield has crept up without some investors noticing.

Over the past five years, the share price has slumped by 47%. A falling share price can mean a higher dividend yield. That 47% fall is particularly shocking because over the same period, the wider FTSE 100 has risen by 75%.

Five years ago, packaging shares were highly sought after as the pandemic-era home shopping boom sent demand for packaging materials up.

Still, that sort of share price decline (and the fact the long-term trend has been downwards, not moving around lots along the way) looks alarming.

What is going on with this dividend stock?

Challenging times, but a solid business

Last year it tried to take over rival DS Smith, but lost out in the end. That is not necessarily bad but does underline that Mondi’s current strategy may not be enough to get the company where it wants to be over the long term.

Meanwhile, management described the most recent quarter’s trading environment as “challenging“. I see this as something that not only could continue, but may get worse before it finally gets better.

From power costs to material inflation, and disappointing sales in its corrugated and flexible packaging divisions, Mondi has a lot to deal with. The demand outlook for packaging is less buoyant than it was a few years ago.

That could mean smaller profits. However, Mondi’s juicy dividend continues to be covered by its diluted earnings per share. In the first half, shareholder dividends cost €202m.

That was amply covered by net cash from operations, but other investing and finance costs meant that Mondi’s free cash flows for the half-year period were negative. The company held this year’s interim dividend flat.

Longer term, aside from current industry headwinds, I see this as an attractive business. The long-term demand outlook for packaging ought to be strong.

The industry is one where economies of scale and multinational reach can help a company. Mondi is one of a small number of large global packaging businesses that I think can fully benefit from that.

It has an extensive asset base of production facilities around the world, as well as long industry experience and a sizeable customer base.

Over time, I think Mondi ought to be able to improve its business performance. Meanwhile, the yield is attractive to me and I see this as a dividend stock investors should consider.

The post With a 7.1% yield, what’s going on with this overlooked FTSE 100 dividend stock? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. 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.

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