In the market crash caused by Covid 19, not many industries and companies have proved to be crash-proof.
DS Smith (LSE:SMDS) however does fall into my bracket of crash-proof. I feel it could emerge unscathed longer term from the effects of this current crisis.
A leading provider in packaging solutions for consumer goods companies, the London-based firm operates across nearly 40 countries. With over 30,000 employees, it is truly a packaging powerhouse. Its presence and rise in Europe and the US make it a stock to watch, as does its appetite for acquisitions.
With the coronavirus lockdown in full force in the UK, there has been unprecedented demand for groceries and online shopping. DS Smith has greatly benefited from this as its core activity is in food and e-commerce packaging.
Performance and Covid 19
When the market collapse started, DS Smith saw a share price drop from near 370p, down to 250p at the beginning of April. At the time of writing, the share price has climbed back close to the 300p mark. Still, the opportunity to pick up a Footsie champion at a bargain price is strong right now, I feel.
DS Smith plays a crucial role in the supply of goods like food and household items. This provides it with a strong position, especially in times of economic and political stress such as now. This is one of my primary reasons for placing it in the crash-proof category.
A trading update provided at the beginning of this month pointed towards its resilience and the limited impact of Covid-19. It also said demand for its corrugated box solutions had increased during the first six months of its current fiscal year.
Covering off geographical regions in its update, Southern Europe was identified as seeing some issues. This was to be anticipated with the pandemic hitting Italy and Spain hard. North American trading was described as “robust.”
It also decided to axe the interim dividend payment. This was a necessary step in my eyes, based on current circumstances. Do not mistake the dividend cancellation for a weaker balance sheet as the company has over £1bn worth of undrawn loan facilities.
What I would do now
With the recent panic-buying, supermarkets have been reporting strong trading. If you couple this with a rise in demand for online items, it is clear that DS Smith can thrive during this current crisis. E-commerce is a division in which it has invested increasingly and that is now bearing fruit.
A healthy price-to-earnings ratio of close to 13 represents no risk and a healthy valuation of this stock. Bear in mind, profit has been increasing year-on-year for the previous five years too. Coupled with an eventual resumption of dividend payments at similar levels to the past, it would offer a dividend yield of over 5%. What’s not to like?
Overall I feel its long-term outlook, market position and the fact the current market is assisting its positive performance are all reasons to invest. In a bear market, safe investments are more important than ever. In my opinion this is one of those.
