International Paper Co. (NYSE: IP – $52.34) is the world’s largest paper and forest products company with the leading share in the manufacturing of containerboard in the U.S. It is a major global producer of renewable fiber-based packaging, pulp and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, Asia and Russia. Dating back to 1898, the Memphis-based company’s operating segments include Industrial Packaging (66% of sales) to include container board and corrugated packaging; Printing Papers (24%) such as paper for office and industrial printing under the Hammermill and HP names; and Consumer Packaging (10%) to include cups, lids and food packaging for the fast food, pharmaceutical and consumer products industries.
In 2012, International Paper acquired Temple-Inland for $4.5 billion in cash. Temple-Inland is a major manufacturer of linerboard and building products for residential construction. The deal made IP the largest producer of linerboard in the U.S., with a share of about 33.5%. In early December of last year,the company completed its acquisition of Weyerhaeuser’s pulp business. The $2.2 billion purchase should strengthen IP’s position in the global Fluff Pulp market. It should be noted that the company operates in a highly cyclical and capital-intensive industry. Demand for the company’s products is dependent on several factors, including industrial non-durable goods production, consumer spending, commercial printing and advertising activity and white-collar employment levels. IP is also subject to currency translation factors, which can be volatile.
International Paper ended 2016 with full-year adjusted earnings of $3.35 per share and the Street is expecting $3.61 and $4.19 over the next two years. Total sales last year were $21.1 billion and expectations for this year are about $22.2 billion. Operating margins have been improving and should continue to late decade. Dividends have increased each year since 2010 at an annualized clip of 20% to its current payout of $1.85 per share yielding 3.56% at current levels. The balance sheet is in decent shape and I expect the company to deduce its hefty $10 billion long-term debt position somewhat down the line thanks to strong cash flow. The company is also aggressively buying back shares. The stock, trading at 14.5 times estimated 2017 earnings, is not without risk and income investors should take note. Hence, while I am adding the position to the income portfolio at an allocation of 7%, I am also taking a 9% stake in the aggressive account. In all, these shares may tempt patient investors and I believe positions offer healthy, albeit precautionary, total return potential over the 2019-2021 time frame.
In the interest of full disclosure, I maintain a position in International Paper Co.