FTSE 100 stalwart DS Smith (LSE:SMDS) has seen its share price drop by close to 20% in the past two months. What’s happening? And with shares cheaper than usual, should I add some to my portfolio?
Macroeconomic pressures
DS Smith is a leading provider of packaging solutions to customers throughout the world. It has expertise in paper, packaging, and recycling with operations in more than 34 countries and around 30,000 employees. DS Smith can count powerhouses such as Amazon and fellow FTSE 100 incumbent Unilever among its customer base.
As I write, DS Smith shares are trading for 378p. In the past two months, the DS Smith share price has dropped by 17% from 455p on 9 September. Over a 12-month period, however, the shares are still up by 17%.
So why has the DS Smith share price dropped off? I believe macroeconomic pressures such as rising inflation, cost of raw materials, supply chain and haulage issues linked to Brexit have hampered DS Smith.
For and against
With DS Smith cheaper than usual, I want to know if I should add shares to my portfolio.
FOR: When reviewing investment viability, I look at a firm’s place in its respective market. This is a positive for DS Smith as it is a leader in its sector. It possesses an excellent profile and customer base as well as a vast reach globally. Furthermore, it is a good option from an environmental, social, and corporate governance (ESG) investing perspective, which is on the rise right now with its focus on recycling materials.
AGAINST: The same macroeconomic pressures that have affected the DS Smith share price do worry me. The well documented issues with supply chain and haulage as well as rising costs of materials could cause a severe dent in financials and performance. This could in turn affect any investor sentiment and returns too. It is worth noting that this issue would affect lots of other FTSE 100 picks in many other industries too.
FOR: DS Smith does have a good track record of performance. I understand historic performance is not a guarantee of the future but I find it is a good gauge nevertheless. I can see the company has recorded revenue of £5.5bn and over for the past four years in a row. Gross profit increased year on year for three years prior to 2021 results, which were impacted by the pandemic. Furthermore, DS Smith has a dividend yield of just over 3%, which could make me a passive income.
AGAINST: Looking at the DS Smith share price, a case could be made that it is currently expensive compared to its recent performance and its debt levels are higher than I would like. DS Smith’s price-to-earnings ratio is close to 29, whereas the average on the FTSE 100 is closer to 20. Any further issues and bad news could make things worse and the shares more expensive.
FTSE 100 opportunity or one to avoid?
Overall, I believe DS Smith is a good option for my portfolio and I would buy shares. I understand the issues it is currently facing but some of these, such as the macroeconomic issues, are industry-wide. For me, the negatives are outweighed by the positives such as a favourable track record, a passive income option and being a market leader, which should see it through tough times.
Jabran Khan has no position in any 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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