International Paper: Fluffy Yield Plus Upside Potential

Paper is going the way of the dodo. At least that’s what tech gurus and futurists keep telling us. Paperless offices, cloud storage, online collaboration, digital media, ebooks, email – all of these suggest they might just be right. In such case, why would anyone invest in a company called International Paper Co (NYSE: IP)?

But this is very simplistic thinking. True, paper use has shrunk in the digital age. Still, it doesn’t mean that paper is obsolete. Hard copies will be around for a long, long time.

More importantly, International Paper is not a company supplying just paper. In fact, its pulp and fiber-based packaging operations will drive any future growth. In December 2016, International Paper paid $2.2 billion for the pulp business of Weyerhaeuser (NYSE: WY). It formed the basis of International Paper’s Global Cellulose Fibers division. It produces fluff and specialty pulp, the former being a particularly valuable material.

Overview of International Paper

International Paper
International Paper

The biggest pulp and paper producer in the US started on January 31, 1898. It came to be through the merger of 17 pulp and paper mills. The new business was incorporated in Albany, New York.

Nowadays, International Paper operates globally, employing about 55,000 people across nearly 30 countries. It has manufacturing facilities in the Americas, Europe, North Africa, Asia, and Russia.

International Paper supplies cellulose fibers, coated paperboard, containerboard, corrugated packaging, food containers, and printing and writing papers.

Headquartered in Memphis, Tennessee, the company currently has a market capitalization of about $24.1 billion.

In 2016, International Paper booked revenues of $21 billion. Industrial packaging accounted for the bulk of sales, bringing in $14 billion. The papers segment contributed $4 billion to the total. Consumer packaging and global cellulose fibers generated sales of $2 billion and $1 billion, respectively.

Dividends

International Paper began paying dividends in 1946. While this is a solid track record, it hasn’t been consistent. What might rattle income investors is the massive dividend cut the company made in the heyday of the most recent economic downturn. In 2009, International Paper went from a quarterly dividend of $0.25 per share to a mere $0.03 per share. However, annual dividend growth resumed in 2010 and has kept steady since then. Over the past five years, the annual payout has risen by 12% on average.

Shareholders in International Paper are currently receiving $0.46 per share, up from $0.44 in 2016. The dividend yield stands at 3.2% against an industry median of 1.8%.

Why consider investing in International Paper?

In certain contexts, “fluff” is not a good word. However, it’s certainly so for International Paper. Why? Because fluff is a key material in the production of diapers. But we’re not talking just baby diapers here. In fact, International Paper is set to benefit most from the rapid growth in the adult diaper market. Demand for adult incontinence products is forecast to rise steadily in the years ahead due to an aging population.

In addition, the digital age is not all bad news for International Paper. The e-commerce explosion in recent years has spurred demand for cardboard boxes. With Amazon (NASDAQ: AMZN) being a key customer, one could say that International Paper is well-placed to benefit from the shift to online shopping.

Valuation

The cards are now stacked favorably for International Paper. However, investors should keep in mind that we have a highly cyclical stock here. On a positive note, the company benefits from its leading market position, an extensive distribution network, and strong global presence.

That said, the stock is trading around its 52-week high. At the time of writing, the share price is $58.28. The highest value over the past year was $58.86, while the lowest was $43.28. According to Barron’s, the stock has a 25% upside on top of the attractive yield.

On the other hand, the forward P/E ratio is 15.7 versus an industry median of 17.3, according to GuruFocus data. This looks tempting but may not justify the high share price. Most investors would probably like to see the company return to sustained growth after its difficulties in the past few years before they consider buying.

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

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