For my retirement share portfolio, I’m looking for stocks underpinned by stable, quality businesses with the potential to grow steadily and pay a stream of rising dividends for years to come.
My plan is to reinvest those dividends to maximise the process of compounding so that, over the next few years and decades, my retirement pot will really take off. As well as rising dividends, I expect the share prices of the investments in my portfolio to rise over time as well.
Steady, defensive businesses
And that means I can’t just invest in any old business. For example, highly cyclical enterprises such as banks, builders, retailers and the like are off my agenda when it comes to buying and holding shares for the long term. I’m not saying I’d never trade such stocks, but the more-cyclical shares available require greater attention to the timing of buying and selling shares, in my opinion.
So, I’m looking for shares backed by companies operating businesses with defensive qualities. Those firms engaged in a profitable niche in the market and displaying defensive qualities such as stable incoming cash flow that isn’t buffeted too much when the inevitable dips in the macroeconomy arrive.
That’s why I like the look of Smurfit Kappa (LSE: SKG), the paper-based packaging supplier. The firm is a big producer of corrugated packaging, containerboard and ‘bag in box’ operating in Europe and the Americas. It seems to me that the demand for such products will remain elevated in today’s world.
The firm has an impressive record of raising its dividend, and City analysts expect that trend to continue with more rises pencilled in for this this year and next. Meanwhile, I find today’s trading update for the nine months to 30 September to be encouraging. Revenue grew 3% in the period with Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) rising 11% and the EBITDA profit margin notching up a small advance of 140 basis points (bps).
Following a mega-trend
In Europe, the volume of corrugated box sales grew almost 4% year-on-year and nearly 2% on an organic basis. In the Americas, organic volume grew approximately 2% with “EBITDA and EBITDA margin improvement year-on-year.”
Chief executive Tony Smurfit said in the report that the quality and geographic diversity of the business overcame the “obvious” macro-economic and political challenges seen during the period. Consumers, he said, are “increasingly demanding sustainable packaging solutions.” He reckons Smurfit Kappa is “ideally positioned” to take advantage of this “megatrend.”
I think the shares are a good fit for my retirement portfolio and the valuation isn’t too demanding either. With the share price near 2,574p, the forward-looking earnings multiple for 2020 is just below 11 and the anticipated dividend yield is around 3.7%. At these levels, I’d be a buyer of the shares with a long-term investment horizon in mind.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2019