I’m always keen to add a top income stock or two to my portfolio and so far I’ve been targeting FTSE 100 shares offering super-high yields.
I’ve been spoilt for choice in that respect, and my recent purchases have included insurance company Legal & General Group, which yields 8.27%, and asset manager M&G, which yields 9.56%.
Two other high-yielding FTSE 100 stocks have caught my attention, telecoms giant Vodafone Group and another asset manager, abrdn. Yet I’m not going to buy them today.
High yields, low growth
abrdn yields income of 6.86% a year but looks expensive, trading at 20.3 times earnings. Vodafone yields 8.23% and is cheap at 9.9 times earnings, but has delivered almost no share price growth for two decades.
So I’ve decided to hunt for a company I think does offer better growth prospects, even if it means accepting a lower yield. This should stop my portfolio from becoming too weighted towards income at the expense of growth.
The stock I’m looking at is paper and packaging giant Smurfit Kappa Group (LSE: SKG). This currently yields 4% a year, above the FTSE 100 average of 3.5%, but less than half the income I’m getting from those recent L&G and M&G purchases. It’s a bit dull in other ways too.
Smurfit Kappa describes itself as the number one European company for corrugated packaging, containerboard and ‘bag in box’, and the only pan-American producer of containerboard and corrugated packaging. It’s unglamorous but an in-demand product range has built a £7.76bn global business with a bright future as we all buy more stuff online.
Like most companies, it has faced challenging conditions, as consumers spend less while inflation drives up costs, particularly energy. Yet it still managed to lift earnings by an impressive 38% last year to €2.35bn, with pre-tax profit up 42% to €1.29bn.
We need the recovery
Better still, it increased its dividend by 12%, suggesting that today’s modest yield offers plenty of scope for progression. Forecasters suggest the yield will climb slowly but steadily to 4.32% in 2023, 4.49% in 2024, and 4.79% in 2025. Oh, and I should have said that the 2022 payout was covered 3.2 times by earnings.
Dividends are never guaranteed, but this one looks a lot safer than many. I don’t want to repeat the mistake I made with two recent double-digit yield purchases, Persimmon and Rio Tinto, which slashed their dividends by 75% and 5% in pretty short order.
While I reckon Smurfit Kappa can deliver share price growth, recent performance has been disappointing (although not disastrous). It’s down 3.99% over the last five years and 6.87% in 12 months.
This has left the stock trading at a tempting valuation of just 7.79 times earnings, despite its prospects for growth once the global economy picks up. One risk is that interest rates stay higher for longer than expected, hitting sales and delaying the recovery, while pushing up the cost of servicing its £2.9bn debt.
Management has sidestepped other challenges by making its products entirely 100% renewable and buying 70,000 hectares of forest to control its paper costs. Smurfit Kappa may never roar, but it’s no paper tiger.
