A cheap FTSE 100 growth-and-income stock I’d buy and hold for the next decade

G A Chester highlights the investment appeal of a FTSE 100 (INDEXFTSE:UKX) blue-chip and a flying FTSE 250 (INDEXFTSE:MCX) stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You’d be hard pressed to think of a more mundane business than making cardboard boxes. But this is exactly what the fittingly dull-named DS Smith (LSE: SMDS) does. And it does it very well. Indeed, it’s a FTSE 100 firm and has a market capitalisation of over £6bn.

I believe DS Smith has considerable investment appeal. There are good drivers to continue increasing its earnings at a good clip in the coming years, and bright prospects of rising dividends from a decent starting yield at today’s share price.

Meanwhile, food-on-the-go retailer Greggs (LSE: GRG) is doubtless a more familiar name, despite being in the second-tier FTSE 250 index, and having a market-cap at a sixth of that of DS Smith. The Greggs share price is up over 5% today, as I’m writing, after the company released a strong Q3 trading update. Could this be another stock with ‘goldilocks’ growth-and-income appeal?

Return to growth

Greggs shares dived on a profit warning back in May, with the unusually severe weather in March and April appearing largely responsible. My colleague Paul Summers saw this as an opportunity to buy into a well-run company at a depressed price. By the time of its half-year results in July, business was looking brighter, and today’s Q3 update confirmed continuing positive progress.

Total sales for the 13 weeks to 29 September increased 7.3%, bringing growth for the year to date up to 5.9%. Management’s profit guidance for the full year implies no advance on last year’s earnings per share (EPS) of 64.5p and dividend of 32.3p. This gives a price-to-earnings (P/E) ratio of 16.4 and a dividend yield of 3% at a current share price of 1,060p.

Earnings and dividend growth are set to resume in 2019, and with the company investing heavily in its supply chain and IT systems, the longer-term outlook is also good. That’s because it will have the capability to increase its shop capacity by over 30%. In this light, I don’t view the P/E of 16.4 as prohibitive. I’d happily buy the stock today in the expectation of good capital and income growth over the next decade.

The complete package

DS Smith looks to me an even stronger value proposition at a share price of 448p. City forecasts for its current financial year (ending 30 April 2019) of EPS of 37.8p, and a dividend of 16.7p, give a P/E of 11.9 and a yield of 3.7%.

The company’s focus on sustainable packaging in resilient and growing sectors, including fast-moving consumer goods, and especially e-commerce, provides a strong tailwind. Furthermore, I expect DS Smith’s growth to be juiced by two large strategic acquisitions. The $1.1bn purchase of US-based Interstate Resources last year is already delivering well ahead of initial expectations and I see similar potential for the €1.9bn acquisition of Spain’s Europac (a leading Western European integrated packaging business), which is due to complete by the end of this year, subject to regulatory approvals.

DS Smith has a strong track record of integrating acquisitions and with the current undemanding P/E, I rate the stock a ‘buy’. Again, as with Greggs, this is in the expectation of good growth in both capital and income over the next decade.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »