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A 7% dividend yield is enough to grab any income investor’s attention, and Mondi (LSE:MNDI) is no exception.
The FTSE 100 paper and packaging group doesn’t necessarily spring to mind as a top dividend stock. However, this £3.6bn market cap company has quietly been climbing towards the top of the Footsie dividend payout tables.
What’s happening to the Mondi share price?
The company’s shares have drifted this year and are sitting at £8.49 as I write on 23 October and coming off a 12-year low.
It’s been an unfortunate combination of factors that have hit the company’s valuation in recent times. Revenue has been hit by lower pulp prices, which have been in long-term decline as well as falling demand since the pandemic.
Combine this with higher transport and energy costs, and profits have slumped. The company is focusing its efforts on cost-cutting initiatives and pausing expenditure, but I think it needs to see a serious demand pickup to deliver a long-term stable dividend.
The good news for investors is that increasing e-commerce activity could be the shot in the arm the stock needs. Demand for packaging is likely to increase in the near future while the company also positions itself towards sustainability-focused packaging solutions for the future.
Valuation
Mondi currently trades on a trailing price-to-earnings (P/E) ratio of 23 with a dividend yield around 7.1%. That is nearly double the Footsie average yield, which could be worth considering for income investors despite the recent share price struggles.
I think there are two key questions that investors should answer when it comes to buying Mondi shares.
Firstly, are the long-term trends and business positioning supportive of growing revenues and profitability? And secondly, despite recent challenges, have the company’s shares been oversold? Could they be worth picking up near a 12-year low?
Risk and reward
I like that the company has a strong foothold in everyday packaging rather than heavy industry. The group’s operating structure provides scale across kraft paper, corrugated solutions, and flexible packaging, which I think helps to spread risk across customers and end uses.
Income is a clear draw card here. A yield north of 7%, supported by consistent distributions could appeal to those building a passive income.
Of course, there are risks involved. Packaging demand is cyclical, so periods of reduced demand and weaker consumer spending can put pressure on profits and dividends. Similarly, cost pressures can eat away at margins even if revenues stabilise.
Key takeaways
For passive income investors, the company’s 7.1% yield is very attractive and I like that its core markets are tied to everyday needs.
Having said that, given the current earnings outlook and P/E ratio, I do think there are better value options than Mondi right now which have a more stable outlook for their long-term income potential.
