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International Paper: Fairly Valued, Decent Dividend Yield
Stock Analysis & Ideas

International Paper: Fairly Valued, Decent Dividend Yield

International Paper (IP) is a global industry leader and producer of renewable fiber-based packaging, pulp, and paper products. The company has manufacturing operations internationally, supplying more than 25,000 customers in 150 countries.

On October 1st, 2021, International Paper spun off its printing papers business into a separate publicly-traded company, Sylvamo Corporation (SLVM), to concentrate on its more exciting operations that include mostly industrial packaging.

Hence, International Paper now runs two segments: industrial packaging and global cellulose fibers. These two segments accounted for around 75% of last year’s revenues. So, the primary business model remains rather similar. I am neutral on IP stock. (See Analysts’ Top Stocks on TipRanks)

Q3 Results: Improving Performance Post COVID-19

International Paper has been notably impacted by COVID-19, specifically by the ongoing supply chain challenges and the substantial inflation levels which affect its margins. However, despite the challenges, International Paper’s latest results pointed towards a solid recovery.

In Q3, revenues grew 11.5% to $5.71 billion, while adjusted EPS nearly doubled versus the comparable period last year, jumping from $0.71 to $1.35. While the company’s costs increased due to the ongoing steep inflation, International Papers also implemented price hikes across all business segments.

Management’s comments suggested that demand should continue to be strong. At the same time, margins are likely to expand extensively in the upcoming quarters as a result of the company’s robust pricing, which is expected to outpace inflation.

The Dividend 

International Paper’s dividend had grown annually from 2010 to 2020. The dividend was cut by around 10% back in October. However, this was not actually a cut in the usual sense. This is because the cut was in balance with the capital that was carried to shareholders through new shares in Sylvamo.

The current dividend per share (DPS) run rate of $1.85 implies a yield of 3.8%, which along with the company’s $2 billion worth of stock buybacks that were announced with the latest DPS declaration, should make for very strong capital returns in the coming years.

That said, it must be noted that International Paper’s capital allocation could change amid an adverse economic environment as the company is heavily indebted, with $8.2 billion in long-term debt on the balance sheet as of the quarter’s end. Still, the company did pay down around $235 million in Q3, so leverage could decline going forward if reductions continue at this pace.

The Valuation

International Paper’s business is vulnerable to market cyclicalities. That said, the company does have competitive advantages due to being one of the most prominent players in the space, supplying some of the biggest companies on earth on a regular basis.

The stock’s P/E based on its Fiscal Year 2021 expected EPS of $4.25 stands at around 11.4, which in my view, is rather inexpensive. In fact, due to its relatively high yield in the current environment, I wouldn’t be surprised to see a valuation expansion following a potential dividend hike next year. I am neutral on the stock, nonetheless.

Wall Street’s Take

Turning to Wall Street, International Paper has a Hold consensus rating based on three Buys, five Holds, and two Sells assigned in the past three months. At $55.11, the average International Paper price target implies 14.8% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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