The DS Smith Group (LSE: SMDS) share price has been volatile and buffeted by economic events.
But the underlying business is sound. The FTSE 100 company provides sustainable packaging solutions, paper products, and recycling services around the world. And that sector looks well placed to serve strong demand over the coming years.
Value and shareholder income
Meanwhile, with the share price near 300p, the valuation looks undemanding. The forward-looking earnings multiple is just below nine for the trading year to April 2025. And the anticipated dividend yield is around 6%.
DS Smith Group dropped the ball in the pandemic year with the dividend. Nevertheless, in today’s (7 December) half-year results report, the company held the interim dividend at last year’s level of 6p. That was despite a year-on-year drop in revenue and earnings. The directors said they consider the dividend to be an “important component” of shareholder returns.
The six months to 31 October were tough for the business. The directors said the macroeconomic environment “remained challenging” and overall market demand was “weak”. There was a decline in like-for-like box volumes of 4.7% year on year.
But some green shoots of potential recovery brightened the outlook. Customer destocking is “largely over”. The directors are seeing signs of volume improvement. And the second-quarter performance was better than the first.
There’s no doubt this business has cyclical elements and sensitivities to its operations. But there’s both opportunity and threat in that situation for investors. For example, I’d argue that the difficult period over the past few years has delivered a low-looking valuation. And we might not have had that if economies had been firing on all four cylinders.
An optimistic outlook
Looking ahead, the company sees opportunity beyond the short-term challenges. The structural growth drivers of “plastic replacement and changing retail formats” are strong, the directors said. And that bodes well for the medium-term outlook.
Chief executive Miles Roberts pointed to the company’s focus on value-added packaging solutions mainly for fast-moving consumer goods customers. There are positive trends in that market and the directors expect volumes in the second half of the trading year to be “stronger” than the first half. On a like-for-like basis, the business continues to “win market share”.
However, there are risks for shareholders here as well as positive potential. The company’s markets will likely “remain challenging”. And there’s competition in the sector. Nevertheless, a focus on customers and costs should deliver full-year results in line with management expectations.
City analysts predict a decline in earnings of about 14% for the current year with a flat result the year following.
Meanwhile, Miles Roberts intends to retire from his role as chief executive after 13 years at the helm. After working his notice period, he’ll be gone by no later than 30 November 2025.
That gives the company time to find a successor. And it’s possible the new chief may arrive just as the fortunes of the business improve. On top of that, new blood at the top of any business can bring new ideas, energy and perspective. I see such change as broadly positive.
On balance, DS Smith Group looks like it’s well worth investors’ deeper research and consideration right now.
