Interactive Investor

ii view: packager DS Smith boxes up 20% dividend hike

22nd June 2023 15:14

by Keith Bowman from interactive investor

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E-commence and environmental credentials and sat on an attractive dividend yield. Buy, sell, or hold? 

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Full-year results to 30 April

  • Revenue up 14% to £8.2 billion
  • Adjusted operating profit up 40% to £861 million
  • Final dividend of 12p per share
  • Total dividend for the year up 20% to 18p per share
  • Net debt up 10% to £1.64 billion 

Chief executive Miles Roberts said:

"The performance of the business during the year has been excellent, despite the challenging economic environment and I am extremely proud of all our colleagues for their dedication and support.

“Our strong customer relationships in the resilient Fast-Moving Consumer Goods (FMCG) sector, together with the investments we are making to drive cost efficiencies and growth, give us confidence for the future."

ii round-up:

Box and paper products maker Smith (DS) (LSE:SMDS) today detailed annual profit in line with City forecasts as higher customer prices more than offset lower demand. 

Revenue growth of 14% to £8.2 billion helped push adjusted operating profit up 40% to £861 million, enabling a one-fifth increase in the total dividend to 18p per share. 

Shares fell 2% in UK trading having gained by around 1% over the last year. Larger rival Smurfit Kappa Group (LSE:SKG) is down 5% and Mondi (LSE:MNDI) by almost 18%. The FTSE 100 index is up by more than 5%. 

DS Smith makes packaging for fast-moving consumer goods (FMCG) customers including Amazon (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle SA (SIX:NESN). Strengthening customer relationships helped it drive record customer ratings and further contract wins. 

A focus on the environment saw it swap out 297 million pieces of plastic packaging for fibre-based alternatives during the year. Similarly, a concentration on cost containment was aided by its three-year rolling energy hedging programme and reduced usage.

Accompanying management outlook comments flagged trading in line with expectations despite lower than normal product volumes. 

A first-quarter trading update is scheduled for 5 September. 

ii view:

Started as a box making business in the 1940’s, DS Smith is today a major provider of sustainable packaging, paper products and recycling services worldwide. It employs around 30,000 people in over 30 countries. Structural growth drivers focus on e-commerce expansion and environmental trends to replace plastic packaging. Over 80% of all corrugated packaging sold is sent back to its paper mills for recycling. 

For investors, the tough economic backdrop including higher interest rates should not be overlooked. Elevated costs persist, group net debt rose year-over-year, while the previous suspension of its small operations in Ukraine remains noteworthy.   

On the upside, growth in e-commerce and a continued move towards more sustainable packaging materials provides potential. Product price increases and management initiatives are helping to counter rising input costs, while the forecast dividend yield now stands at over 6%.  

Analyst consensus estimate of fair value sat at over 390p per share implies room for longer-term optimism, with the dividend rewarding shareholders for waiting.

Positives: 

  • Exposure to e-commerce and environmental trends
  • Attractive dividend (Not guaranteed)

Negatives:

  • Elevated input costs
  • Uncertain economic outlook

The average rating of stock market analysts:

Buy

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