Domtar: Time to Reinstate the Dividend?

 |  Includes: IP, UFS
by: Market Blog

By David Berman

During the remarkable stock market rebound of the past 13 months, you might not think that a Canadian paper producer would be among the biggest winners – especially one that endured the humiliation of a stock consolidation and a dividend halt previously.

But Domtar Corp. (NYSE:UFS) has indeed been a big winner, rising 710% from its low in March 2009 and 27% this year alone. Are there more gains ahead?

Paul Quinn, an analyst at Royal Bank of Canada, thinks so: He maintained a “top pick” recommendation on the stock but raised his 12-month target price to $100 (U.S.) from $85. (The shares trade in New York as well as Toronto).

Part of his enthusiasm for the stock comes from an expectation for higher paper prices. International Paper Co. (NYSE:IP) announced a price hike for May 3, and Domtar has followed suit with a price hike for May 10.

“With other paper companies expected to join the party, we believe this price hike will be successful,” Mr. Quinn said in a note.

That means more free cash for Domtar – Mr. Quinn raised his estimate for earnings before interest, taxes, depreciation and amortization by $97-million in 2010 and $139-million in 2011 – which raises the question of what the company will do with the extra money.

According to Mr. Quinn, the company has already reached the lower end of its net debt target, so paying down more debt is unlikely. That leaves the prospect of a dividend, which was discontinued in 2005. Mr. Quinn thinks Domtar will reinstate the dividend before the end of the year.