A FTSE 100 dividend growth stock I’d buy today alongside this top small-cap growth stock

The Motley Fool

Investors in packaging producer DS Smith(LSE: SMDS) have enjoyed fantastic market-beating returns over the past 10 years.

According to my figures, including dividends, the stock has produced a total annual return of 25% since 2008, that’s 15% higher on average per annum than the FTSE 100 over the same period.

Both earnings and dividend growth have helped power the shares higher. Net profit has increased at an average annual rate of 29% since 2013, supporting dividend growth of 15% per annum over the same timescale.

Is the price worth it?

This performance has undoubtedly earned the company a position in the FTSE 100 Hall of Fame. And, unlike so many other stocks that have delivered market-smashing performance, the shares remain appropriately priced today.

City analysts have the company’s earnings per share (EPS) jumping 43% in fiscal 2019, giving a forward P/E of 10.9. However, there’s a degree of risk to these numbers, because the company’s ability to hit this earnings growth target depends on the success of its integration of Europac.

DS announced that it was acquiring its Spanish competitor earlier this year in a deal worth €1.9bn. The merger is expected to make a substantial contribution to the enlarged group’s bottom line. And management also believes it can draw out synergies of €50m by combining duplicate operations.

However, as is the case with all large integration projects, there’s a risk that the merger could destabilise DS, as management focuses on integration while neglecting the rest of the business. It seems that this is what the market’s concerned about. Without concrete numbers showing the benefits of the deal, I reckon investors will continue to view DS with a degree of scepticism.

That said, I’m also excited by DS’s current valuation, so I’m willing to give management of the benefit of the doubt here. Indeed, DS has a history of successfully integrating new businesses. There’s a good chance they will hit the mark this time around as well.

That’s why I am a happy buyer of the stock at current levels. I’m also interested in the prospects for newly-listed company Mind Gym (LSE: MIND).

Founder-led

Mind Gym describes itself as a behavioural science business that uses products to deliver “human capital business improvement solutions.” According to its website, these solutions include programmes to help employees improve at work and support management training programmes.

The business has seen a substantial boost recently from the #MeToo movement, as clients have approached the company looking for help in improving their corporate culture. This spike in demand helped profits nearly double in the last financial period to £7.8m.

What I like about this business is that it’s still manager-owned. Even though the founders pocketed £24m when they took the business public, they still hold just under 65% of the stock, giving them a strong incentive to produce the best returns for shareholders.

So, even though it is still only early days for the company’s life as a public business, I’m cautiously optimistic on its outlook. I think it could be worth a dabble at current levels, ahead of half-year results to the end of September which are expected to be released on the 4th of December.

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Rupert Hargreaves owns no share 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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