Yahoo Finance Forget exciting stocks – dull companies are usually the best bets
Some companies are inherently more interesting than others. For example, a company seeking to develop robots which can replace humans is much more likely to captivate investors than a business which produces packaging.
However, interesting companies do not necessarily make for sound investments. Their share prices can easily be overinflated by investor excitement. Therefore, it is imperative that investors do not decide where their hard-earned cash is invested based on what interests them or which companies they find interesting.
Rather, they should rely on cold, hard facts and a solid investment process that seeks to identify high quality companies when they temporarily offer a wide margin of safety. Such stocks are relatively likely to generate a high return in the long run, which should be the only source of excitement when investing.
For instance, the business model of FTSE 100 packaging company Smurfit Kappa is not the most riveting of topics. But, in Questor's view, the stock offers a potent mix of capital growth and income potential that is likely to prove far more enthralling than many products and services found elsewhere.
The company designs, manufactures and supplies innovative paper-based packaging solutions to a range of industries across the globe.
Importantly, its products are 100pc renewable. This means it is well placed to capitalise on growing environmental concerns across a variety of sectors, with almost two thirds of consumers more likely to buy products from a brand or retailer that uses sustainable packaging.
Due to its vertically integrated business model, which even includes 68,000 hectares of forest and extensive recycling operations, the company has been able to successfully overcome a period of rampant inflation. Its latest annual results, released in February, showed a 0.6 percentage point year-on-year rise in operating profit margin.
Although global inflation is widely expected to rapidly fall this year, central bank forecasts have previously been highly inaccurate. The company's capacity to perform well during periods of high inflation could therefore prove to be a useful ally over the medium term.
Revenue, meanwhile, rose by 27pc and pre-tax profits were up 42pc in the 2022 financial year. This prompted an 11pc rise in full-year dividends per share, which have increased by an inflation-beating 397pc over the past decade. Shareholder payouts are still covered 2.6 times by earnings, which suggests they are highly affordable. The stock yields 4.1pc, which is 0.5 percentage points higher than the FTSE 100 index's yield, and goes ex-dividend on April 13.
Smurfit Kappa's net debt increased by 4pc during its latest financial year after it made several acquisitions. However, a net debt-to-equity ratio of just 60pc, when combined with net interest cover of 10, suggests the company can accommodate greater leverage to pursue further purchases that strengthen its competitive position.
That said, achieving a return on equity figure of 20pc in its latest financial year, in spite of having only modest debt levels, provides clear evidence of a large competitive advantage over rivals that is likely to prove highly sustainable.
Trading on a price-to-earnings ratio of less than 10, the company's shares appear to be undervalued. Clearly, the world economy's short-term outlook is somewhat precarious at the present time. Extreme inflation has prompted a squeeze on consumer disposable incomes across vast swathes of the global economy, although this is set to ultimately ease as the full impact of rapidly rising interest rates on inflation is felt.
While fast-paced monetary policy tightening could cause challenging trading conditions for Smurfit Kappa, since an economic slowdown seems likely, its solid financial position, diverse geographical footprint and substantial competitive advantage limit overall risks. Furthermore, its wide margin of safety means near-term economic challenges are likely to have already been priced in by investors.
In Questor's view, the company has immensely sound fundamentals that suggest high capital returns and a growing dividend are ahead in the coming years. This prospect, on its own, should provide enough excitement to warrant purchase.
Questor says: buy
Ticker: SKG
Share price at close (April 10): £29.52
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