I’ve been keen on the FTSE 100’s Smurfit Kappa Group (LSE: SKG) for some time, so couldn’t believe my luck when the fickle stock market sent the shares plunging last year in the big sell-off.
The paper-based packaging provider has a lot of defensive characteristics and an awesome record of raising its dividend, which is up more than 230% over the past six years. And there’s been strong support for those dividend payments from robust-looking cash inflow, which has been rising a bit each year. Earnings have been well covered by that torrent of cash. The business looks strong to me, and that makes it a decent candidate for my income portfolio.
Out with the bathwater
Yet the share price plunged more than 40% between the end of August 2018 and mid-December in what is starting to look like a baby-out-with-the-bathwater move. Indeed, the firm posted some impressive financial figures with its full-year results today, and the shares have been clawing their way back up since the beginning of the year – and rightly so.
The share price sits at 2,342p as I write, and it’s looking perky today on the news. At that level, the price-to-earnings ratio runs just above nine and the dividend yield at about 3.7%, which I think is attractive given the firm’s long history of moving its dividend payment higher each year.
If the market was expecting a cyclical slowdown from Smurfit Kappa, it will be surprised by how upbeat today’s report is. The company’s worldwide operations delivered a 4% increase in revenue during 2018 with an underlying rise of 7%. Free cash flow shot up 61% and adjusted earnings per share moved 58% higher. The directors expressed their confidence in the outlook by pushing up the final dividend for the year by 12%.
There’s been a good showing on quality metrics for a long time, and the return-on-capital figure improved even further in the period, rising from 15% up to more than 19%. One slightly negative figure is that net debt moved 11% higher to €3,122m. However, that could have been affected by “significant” acquisition activity, which saw the company acquire businesses in France, the Netherlands and Serbia.
A positive outlook
Chief executive Tony Smurfit explained in the report that the firm has been transforming itself in “recent years” and delivering “progressively superior returns.” I think there’s proof of that in today’s figures. Looking forward, Mr Smurfit said he is “always conscious of macro-economic risk,” but he believes the company is “well positioned to capitalise on industry opportunities.”
There’s no sign of any weakness in trading and I see the fallen share price now as an opportunity to buy into that rising dividend at a reasonable price. The firm is expanding and I’d be happy to hold the shares with a long-term investing horizon in mind.