I first bought shares in packaging company DS Smith (LON:SMDS) back at the beginning of March this year. I’ve then added to my holding in June for a weighted average price of 338.39p. Now the shares are at around 273p I’m sitting on a loss. Obviously. So why are the shares getting pummelled?
What’s getting DS Smith investors offside?
The recent share price fall is particularly irksome seeing as most other businesses associated with e-commerce are being rewarded by shareholders. FTSE rivals Smurfit Kappa and Mondi for example have performed much better over the last quarter. This indicates it may be problems specific to DS Smith that are causing the share price slide.
For a while my holding was in profit so it’s particularly the last month or so where the shares have once again been hit. As can be seen from the six-month chart below from Hargreaves Lansdown.
The picture has changed a bit in the last month. Most notably for many investors I think has been the cancellation of the interim dividend. Given DS Smith could afford to pay one and in a shrinking pool of dividend-paying FTSE 100 companies, it’s disappointing. Then again if long-term it allows DS Smith to reduce debt it could be a price worth paying.
Another factor perhaps is falling paper prices. Though these are outside of DS Smith’s control they still affect profitability. Full year results showed reduced pricing of external paper, recyclate and box prices, down £285m year on year, and a decline in other volumes particularly due to increased paper and recyclate integration and reduced volumes of corrugated sheet, down £175m.
Thirdly, there has been a direct impact on profitability from covid-19. It’s had a direct impact on operating profits of around £15m. Group chief executive Miles Roberts previously said: ‘Our business model is resilient, built on our consistent FMCG and e-commerce customer base.
‘In the short term, however, the impact of COVID-19 on the economies in which we operate is likely to impact volumes to industrial customers and add to operating costs. In particular, infrastructure constraints have driven elevated OCC prices, although we currently expect the impact to be limited to H1.’
Fourthly, there’s the results which showed revenue down 2%. The following analyst downgrades as well following the results will have worsened sentiment.
What will I do next?
For now I’m waiting. I think there will be better ways to earn a return on my money than averaging down on my DS Smith shares just now. My plan will be to see what happens over the coming months and perhaps use any excess cash to buy more shares if they are down more than 25% from when I previously bought. Right now though I’ll be holding.
In the meantime I’m looking at a couple of shares and trusts for income, some thematic ETFs and trusts and some growth and micro caps opportunities. All of which I hope to share on the blog. And all of which I expect could be more profitable than DS Smith.
Could DS Smith shares make for a good income investment?
The rationale for buying the shares was for the income primarily, but also because the company tapped into e-commerce and had sold off its plastics division. It seemed decent therefore from an ESG standpoint. Those developments also seemed positive for me alongside acquisitions. Also, the full-year results did show operating profit rose against a challenging backdrop so I don’t believe DS Smith is performing badly.
I think DS Smith could make for a decent investment for income investors if dividends are reintroduced. Partly I think that will depend on demand and partly on hopefully paying down debt and reducing leverage. It will also be partly dependent on the price of paper.
Overall though I think there are probably better FTSE 100 shares for providing income at this point in time. One would be Rio Tinto which is on my watchlist despite its ESG challenges and another is Severn Trent.
If you like this article please do read some of my other blogs. The most recent looks at why I’ve bought shares in FTSE 100 housebuilder Barratt Developments.
Please always do your own research before buying any share and note I own DS Smith shares as the article makes clear. I don’t directly own shares in any of the other companies mentioned.