When searching for dividend opportunities, it often pays to look outside mainstream FTSE 100 stocks and scan the FTSE 250 index for under-the-radar companies growing their dividends at a healthy rate.
One such company that I like is packaging specialist DS Smith (LON:SMDS) (SMDS.L), which reported its full-year FY2017 results yesterday.
The numbers were impressive, with revenue increasing 18% (6% constant currency) to £4,781m, profit before tax rising 31% (16% constant currency) to £264m and adjusted earnings per share climbing 19% (7% constant currency) to 32.5p.
However, what impressed me the most was the significant increase in the dividend payout.
DS Smith has been an excellent dividend growth stock in recent years, with the company increasing its payout from 5.9p in FY2013 to 12.8p last year, a compound annual growth rate (CAGR) of 29%. And yesterday the packaging specialist announced a further rise, with the company set to pay out 15.2p for FY2017, a 19% increase on last year.
That’s exactly the kind of growth I love to see as a dividend growth investor. While the yield of 3.2% isn’t the highest yield on the market right now, a few years of that kind of growth and before you know it, you’re enjoying a yield that is significantly higher than your original yield. It’s also worth noting that the payout is covered well at 2.1 times.
The company also revealed yesterday that it will buy an 80% stake in US firm Interstate Resources for $920m, funding part of the deal by raising £285m through an underwritten placing of new shares at 10p each. This looks to be an excellent acquisition, and will provide DS Smith with valuable exposure to the US, one of the world’s largest packaging markets.
The results and the news of the acquisition were received well by the market, with the stock rising over 8% to close at 481p. At that price, DS Smith trades on a P/E ratio of 13.6 which seems very reasonable, given the company’s growth in recent years.
I already have a small position in DS Smith and will be looking to add to my position in the near future. I’m hoping the stock pulls back a little from here, so I can pick up a slightly higher yield than the 3.2% currently on offer.
Disclosure: Edward Sheldon, CFA owns shares in DS Smith.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.