Dividend Stock Analysis: International Paper Company (IP)

This morning, with a cup of coffee in hand, I was excited to perform research to identify a potentially undervalued dividend growth stock to consider investing in during the coming months.  As a result of this desire to perform a stock analysis, I will take a deeper dive into International Paper Company (IP).

Who is International Paper Company?

International Paper Company (“IP”) is one of the largest producers of packaging products, pulp for diapers, tissue, hygiene products, and papers.  To dive further, IP has three major segments:  Packaging and container board (61% of revenue), Papers (19% of revenue), and Cellulose Fibers (12% of revenue).

One other thing that stands out about the company is their commitment to the environment.  In the company overview, a significant number of the slides highlight the company’s commitment to using renewable energy, sustaining forests, and doing the right thing.  If you are an investor looking to invest in socially conscious companies, IP appears to fit the bill.

Financial Review – Balance Sheet and Income Statement

The company released their 2018 results and 2019 outlook in January.  The results were excellent.  From an earnings perspective, the company’s adjusted earnings per share grew significantly to $5.32 per share from $3.49 per share. The leading driver of this growth was a strong increase in sales.  Sales grew $1.5b, or 7.2%, over the twelve-month period.  That out-paced the growth in SG&A ($.75b) and SG&A ($.1b).  Not surprisingly, the company’s EBITDA and ROIC sky-rocketed, a point that was highlighted in the linked earnings presentation.

The income statement appears great.  So I will not spend a ton of time covering the results.  Instead, I’ll move on to review IP from a balance sheet perspective using the 12/31/18 10-K.  Let’s start with the current ratio.  We review the current ratio to determine if a company’s short term assets cover their short-term liabilities.   As of 12/31/18, the company had a current ratio of 1.49X ($6,996m/$4,694m).  This is slightly lower than the company’s 12/31/17 current ratio of 1.61X ($8,227m/$5,102m).  Regardless of the decrease, the company still far exceeds the metric of 1X that we look for.

Second, we like to review the company’s debt-to-equity ratio. We hate dividend cuts due to high debt (Thanks Kraft and KMI).  So we are always looking for companies with lower ratios. The company’s 12/31/18 Debt-to-Equity ratio is 1.45X.  Which is high. However, the company has openly discussed their debt reduction in their earnings presentation.  Further,  the company compares their ratio to the industry peers on their website.  From IP’s perspective, their debt levels are below the industry standards.

A Quick Note about their target dividend payout ratio

In addition to reviewing the IS and BS, I reviewed the dividend forecast. When performing research, I came across a  great article on Seeking Alpha at the end of 2018 discussing the company’s dividend strategy. International Paper Company’s management set a target dividend to free cash flow range of 40%-50%.  Therefore, I reviewed the company’s Q4 2018 earnings presentation slides to understand if IP’s 2019 outlook would pass these metrics.  In the slide deck, it showed the company is forecasting $2.0b in free cash flow and a $.8b dividend.  This equates to a 40% ratio, which is at the bottom end of the company’s forecasted range.

Dividend Diplomats Dividend Stock Screener

Next, It is time to run International Paper Company through the Dividend Diplomats’ Dividend Stock Screener. This is the screener we use to determine if the company is considered an undervalued dividend growth stock.  Our stock screener uses three simple screens:

  • P/E ratio (valuation)
  • Dividend payout ratio (safety)
  • Dividend growth rate and history of increasing their dividend (longevity).

For this analysis, we will also compare IP to one of their competitors, Westrock Company (WRK).  We both are shareholders of Westrock.  So it’ll be interesting to see which company performs better in this analysis.

TickerPrice 4/19/19Forward EPSAnnual DividendYieldPayout RatioP/E Ratio
IP$44.33$5.17$2.004.51%38.68%8.57
WRK$35.49$4.06$1.825.13%44.83%8.74

**Sources: Pricing information, forward EPS, and annual dividend were obtained from Yahoo! Finance. The remaining figures in the table above were calculated by the author.

1) Dividend Yield: Typically, I look to invest in companies with dividend yields exceeding the S&P 500 yield of just under 2%. Otherwise, I would consider investing in a nice, diversified S&P 500 mutual fund, or ETF.  Luckily for us, IP has a very strong dividend yield of 4.51%.  While their yield isn’t a strong as WRK, I’m very happy with the mark.

2) Payout Ratio: We typically use a 60% threshold when reviewing a company’s payout ratio. We believe this percentage point allows a company to continue to grow their dividend without sacrificing safety.  IP’s dividend payout ratio is nearly 39%.  Thus, this is a great mark as the company has plenty of room to continue growing their dividend going forward.  Their dividend payout ratio is also comparable to WRK.

3) Dividend History and Dividend Growth Rate: IP has increased their dividend for 9 consecutive years.  The company has a great 5-year average dividend growth rate, 8.54%, for a dividend stock that is yielding over 4%. IP has paid a dividend for a long time as well, after paying their first dividend in the 1940s.   While there was a dividend cut in 2010, management is working towards building a nice dividend increase streak.  Further, having a target dividend to free cash flow range of 40%-50% provides the company with plenty of room to continue growing their dividend.  For that reason, IP passes this metric of the stock screener.

4) P/E Ratio: The final metric of our stock screener focuses on the current valuation of the company. I’m always looking for companies that are trading at a multiple below the broader market. Currently, the broader market has a historical P/E ratio in the mid-20x and a forward P/E ratio between 17x and 18x (per The Wall Street Journal). Using today’s prices, IP’s P/E ratio is only 9.24X.  That is significantly below the broader marketplace.  Before declaring this a pass, I also wanted to consider IP compared to WRK.  IP has a slightly lower P/E ratio compared to WRK.  Perfect!

Summary

International Paper Company performed very well in our stock screener.  IP has a P/E Ratio below the broader market, a strong dividend yield, strong dividend growth rate, and a very nice dividend payout ratio.  The metrics should allow the company to continue growing its dividend.  On top of it, IP has a strong current ratio based on our balance sheet assessment earlier.  IP also performed in line with an industry competitor, indicating the company isn’t overvalued against their peers.

However, there is one knock against the company is their high debt-to-equity ratio.  But, there are two reasons I am not concerned about this.  First, the company has such a low dividend payout ratio.  If IP has a tough year in which there is a slight pullback in earnings, the company has plenty of room before their payout ratio exceeds 100%.  Second, the company has made it clear that a strategic goal of the company is to reduce their debt burden.  It showed in 2018, as the company reduced debt by $.5b.  The company is also planning on continuing to strengthen their balance sheet in 2019.  Therefore, for now, that concern is tabled.

As a result of my analysis, I will add IPC to my next dividend stock watch list and may even initiate a position.  Westrock is also classified the same at the company’s current levels as well.  So, what are your thoughts on this analysis?  Do you own either IP or WRK?  Are you investing in this sector?

Bert

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6 thoughts on “Dividend Stock Analysis: International Paper Company (IP)

  1. Bert,
    I have looked at them too, but I thought WRK was the better move – as was SON a while back. Until people start to do what I have done in my house (actively phased out paper towels and wipes – up the the point my wife was ok with it) then those companies will do fine. IP’s 2010 cut is a bit concerning, but 9 years strong so far is satisfactory.
    – Gremlin

      • We were going through a lot of paper towels, if you have a kid it can get outrageous. I took note of that and said, that I would not buy them once we ran out. She saw I was right in terms of how fast we would use a roll, now we do 90% of stuff in the kitchen with a towels – though there is now a paper towel roll there for seriously disgusting items.
        My advice is just stop buying them, and start using towels/rags yourself. And don’t ask, just do it, see what happens…
        – Gremlin

  2. I started looking at IP soon after you wrote about WRK. I used to own IP a loooooooong time ago but has since shuttled the stock. Looking at all the current metrics you point out IP does look like a stock I would consider buying for my own portfolio and it does sport a safe and juicy yield too. Definitely something to consider.

  3. Nice review. I have looked at IP in the past, but have never purchased it. I like having a few industrial stocks in my portfolio, but they can be more exposed to economic cycles as you know. A lower dividend payout ratio is best in these cases. Thanks for highlighting their dividend guidance. I really like it when a company sets out clear parameters for the dividend and dividend growth. I look for that whenever I do a dividend stock review. Tom

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