Why DS Smith shares could continue their strong run – The Motley Fool UK

After a volatile couple of years, DS Smith (LSE:SMDS) shares showed great resistance during the pandemic with its share price rising consistently. The full-year report published on 22nd June shows how the business managed to overcome a tough period in fiscal 2021 due to the fast-moving consumer goods (FMCG) and e-commerce boom that followed the first lockdown. 

DS Smith faced a tough start to 2021 as well, after a large cut in profits caused by the lowering of average selling prices for boxes, regulation of packaging volume and fluctuation of paper pulp prices. But this price per box has increased since the end of April, driven by the e-commerce marketplace.   

Excellent H2 sales figures in Europe and the US in 2020 have also contributed to the consistent rise in DS Smith’s share price. In fact, profits from the US markets in 2020 went up “70% (on a constant currency basis) compared to the prior year, and H2 63 per cent ahead of H1.” Europe is DS Smith’s largest market, and this overseas growth is a positive sign for shareholders.

The strong increase in online shopping figures, which rose to 36% of total retail spending in the UK by November 2020, helped the company see a massive increase in demand for corrugated boxes. Also, whispers of a potential Mondi takeover deal helped drive the DS Smith share price upwards by 14% in February 2021.

Another encouraging sign for me is the focus on resuming an interim dividend in December 2020 after a healthy H2. The final dividend figures were 0.081 pound per share, taking the full-year payment to 0.121 pound per share. It shows me that the company could resume its 3% dividend yield once the market stabilises after a complete lift in restrictions.

Switch to greener alternatives 

On 9th June 2021, the company also announced that it will strive towards “a 40% reduction of CO2 emissions per tonne of product by 2030, compared to 2019 levels, and a commitment to reach at least Net Zero emissions by 2050.” 

I think this is a prudent move on its part as the company has suffered from the increasing cost of paper recycling, which has nearly doubled in the last year. DS Smith plans on reducing the carbon footprint by “investing in groundbreaking technology, including waste-to-energy solutions, state-of-the-art combined heat and power facilities, and equipment upgrades from new boilers and LED lighting.”

The company also announced two new state-of-the-art packaging plants in Italy and Poland, which shows me that the company plans on long-term expansion across Europe (which is its largest market) and beyond. The focus on long-term growth strategies and the promise of greener manufacturing processes show me that the company is heading in the right direction for sustained success in the market.

Potential risks

The company still remains highly cyclical, in that its performance is dependent on economic conditions and cost of raw materials. Also, the switch to greener manufacturing methods could increase the production costs, which will negatively impact the profit margins, potentially causing a fall in the DS Smith share price.

Despite this risk, I think that the company is making moves in the right direction and I think DS Smith shares can continue to climb in 2021. I see potential in DS Smith being a good long-term option for investment and will be monitoring its performance closely over the next few months.

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Suraj Radhakrishnan 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.

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