One of legendary investor Peter Lynch’s preferred methods in selecting a stock was to find a business that didn’t sound like an exciting investment. Well, FTSE 100 constituent Smurfit Kappa (LSE: SKG) definitely fits that category, as well as suiting me as an investor looking at bringing in solid stocks into my portfolio.
Smurfit Kappa is a leading provider of paper packaging services globally, which utilises recycled paper as a key part of its production process. With online sales booming since the onset of the Covid-19 pandemic, the demand for packaging products have also grown.
As you’d expect, in its full year 2020 results, Smurfit Kappa was able to post increased profit levels and free cash flow, each rising by 10% and 23% on 2019, respectively. The company’s share price has also tracked upwards steadily to reach £34 – though the price is currently slightly down from highs in February, after underperforming against the FTSE 100 during March.
Riding the sustainability wave
One of the keys to how well this company could do in the future is in how it has positioned itself in terms of sustainability. Last month it became the first FTSE 100 company to be given a five-star rating by Support the Goals, because of the company’s support of the United Nation’s Sustainable Development Goals. As such, Smurfit Kappa is able to boast that 75% of the fibres used in packaging are from a recycled source.
Why is this important? Well, you can take a trip to your local supermarket and see that many brands are now pivoting away from the use of plastic and towards paper packaging. This has enabled Smurfit Kappa to establish packaging partnerships with the likes of Kellogg’s, eBay and Heineken, among others. With the increase in online sales expected to be retained with countries opening back up, it’s likely that demand for such packaging will continue to grow.
Strong FTSE 100 dividend
Beyond the opportunity for steady growth into the future, another reason for me to take interest in the stock is the dividend on offer. Smurfit Kappa has consistently paid out a dividend thanks to its strong balance sheet, with the company increasing the dividend by 8% to £0.74 per share this year.
However, there are negative factors that may hold the FTSE 100 company back in the future, such as its debt of £2bn, though this has been reduced from the previous year’s levels of close to £3bn. I would also keep in mind that the stock isn’t likely to see a surge in share price any time soon. There is also the danger that as lockdowns are lifted, and people return to shopping on the high street, some of the increased sales from e-commerce could be impacted.
Overall, I believe Smurfit Kappa is a good addition to my portfolio for its regular dividend, and I’d look to hold my shares in this company that is likely to achieve steady growth in the years to come.