Why Croda isn't the first FTSE 100 dividend growth stock I'd buy today

Today I'm looking at two high quality businesses whose strong growth has propelled them into the blue-chip FTSE 100 index over the last few years. Both are companies I rate highly and would be happy to own at the right price.

A perfect complexion

Speciality chemicals group Croda International (LSE: CRDA) makes a wide range of products including ingredients for cosmetics, agricultural chemicals and chemicals used in lubricants.

The group was the biggest faller in the FTSE 100 on Wednesday morning, down nearly 5%, after it reported a 2.7% drop in sales for the first quarter. This may sound like a disappointing performance for a company with a growth rating, but a closer look suggests things are still on track.

The fall in reported sales was caused by currency headwinds which reduced the sterling value of the group's sales by 5.3%. Measured at constant exchange rates, group sales rose by 2.6% during the quarter.

The standout performer was the personal care group, where constant currency sales rose by 7.6% in Q1 thanks to strong demand for its beauty products. This division generated 34% of sales and 47% of profits in 2017, so it's by far the largest and the most profitable part of the company.

Strong outlook

Croda's speciality chemicals carry high profit margins, perhaps because competition is limited. Last year's operating margin of 23.7% is in line with previous years and well above the FTSE 100 average.

Broker forecasts put the shares on a 2018 forecast price/earnings ratio of 23 with an expected dividend yield of 2%. This may not seem cheap, but I believe the company's proven quality justifies a premium. I'd continue to hold after today's news and would consider buying more if the shares fall further.

One stock I'd buy today

But there's another share I'd consider buying first. The packaging sector has become larger and more sophisticated in recent years. Retail and industrial demand for bespoke packaging that creates less waste and is cheaper to transport has been boosted further by the growth of internet shopping.

One company that's profited from this demand is cardboard packaging specialist DS Smith (LSE: SMDS).

This group serves retail and industrial customers throughout much of Europe. It recently expanded into North America with the £722m acquisition of East Coast packaging and paper producer Interstate Resources.

This deal gives DS Smith an entrance route for its products in one of the world's largest packaging markets. The firm has also recently acquired two firms in Romania, expanding its reach into the European market.

More growth expected

The half-year results showed a return on average capital employed of 14.6%, which is close to the 15% threshold I use to help identify high quality businesses.

Although net debt has risen as a result of Smith's recent acquisition spree, cash generation has historically been strong. I'm confident management will be able to reduce borrowing to target levels in good time.

Adjusted earnings are expected to rise by 1.9% to 34.4p during the year to 30 April, and by 11.6% to 38.4p in 2018/19. This puts the stock on a forecast P/E of 15, falling to a P/E of 13.4 for the year ahead.

With a twice-covered forecast dividend yield of 3.1%, I believe the shares are attractively valued for medium-term growth. I'd be happy to buy at current levels.

Buy-And-Hold Investing

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Roland Head 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.