This article is about International Paper Co. (NYSE:IP) and why it's an income investment and turn around possibility that's being looked at in The Good Business Portfolio. International Paper Co. is a leading worldwide producer and distributor of printing paper and packaging products. The Good Business Portfolio Guidelines, total return, earnings and company business will be looked at.
Good Business Portfolio Guidelines.
International Paper Co. passes 7 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don't break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average.
International Paper Co. is a large-cap company with a capitalization of $15.940 billion. The Company operates in three segments: Industrial Packaging, Printing Papers and Consumer Packaging. International Paper Co. has size over its nearest competitor Avery Dennison (NYSE:AVY) which has a much smaller capitalization of $5.6 billion.
International Paper Co. has a dividend yield of 4.7% that has been increased for the past 5 years. International Paper Co. is therefore a choice for the dividend income investor and its dividend is safe. The average payout ratio is 53% over the past five years which leaves plenty of cash remaining for investment after paying its high dividend
International Paper Co. cash flow is good at $1.97 Billion which leaves International Paper Co. with plenty of cash allowing it to pay its high dividend and have cash left over for stock buyouts and company investment.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. International Paper Co. has a three-year CAGR of 13% strongly meeting my overall requirement. Looking back five years $10,000 invested five years ago would now be worth $12,460 today. This makes International Paper Inc. a good investment for the income investor and with potential for moderate growth as they focus on higher margin products.
International Paper Co. S&P Capital IQ has a four-star rating or buy with a price target of $52.0. This makes International Paper Co. under priced at present and a good choice for the income investor with the investment at today's price having good rewards versus the risk on the downside assuming we are not really in a worldwide recession.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio International Paper Co. did worst than the Dow baseline in my 36.1 month test period compared to the Dow average but does have a positive total return of 2.82% over the test period of 36.1 months. I chose the 36.1 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the losing year of 2016 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. This underperformance of total return makes International Paper Co. appropriate for the aggressive investor who wants a speculation that the changes IP has made in recent years, to focus on faster growing countries and higher margin products will turn the company around and restart the growth potential in the company. If you willing to wait a bit International Paper Co. may be a good total return investment for the patient investor and the high dividend pays you while you wait.
DOW's 36.1 month total return baseline is 26.7%
36.1 Month total return
Difference from DOW baseline
Yearly Dividend percentage
International Paper Co.
Last Quarter's Earnings
For the last quarter International Paper Co. reported earnings on October 28, 2015 that beat expected at $0.97 compared to last year at $0.95 and expected at $0.91. This was a good report showing slow growth year over year. Earnings for the next quarter to be release in Early February are expected to be at $0.85 compared to the last year at $0.53. This will be an important report to see if the turnaround is real. The slow growth performance of earnings so far is a direct result of the focus of the company on better margin products.
International Paper Company is a paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. The Company operates in three segments: Industrial Packaging, Printing Papers and Consumer Packaging. Industrial Packaging segment's products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. Printing Papers segment products include uncoated papers, which engage in the business of producing papers for use in copiers, desktop and laser printers and pulp, which manufactures printing, writing and specialty papers, tissue products and filtration products. Consumer Packaging's coated paperboard business produces coated paperboard for packaging and commercial printing end uses. Its foodservice business produces cups, lids, food containers and plates. Its brands include Hammermill, Springhill, Accent, Ballet, Rey, Pol, Everest, Fortress and Carolina. International Paper Co. business is World Wide and the strong dollar is a head wind to revenues at present.
Takeaways and Recent Portfolio Changes
International Paper Co. is a dividend income and turn around investment choice. Considering International Paper Co. low stock price and its total return underperforming the Dow average the company will be watched by The Good business portfolio and considered when the turnaround is actually seen more fully in earnings. The high dividend of 4.7% provides the dividend income investor with a reasonable entry point to lock in this high yield.
Trimmed Cabela's (NYSE:CAB) to 5.1% of the portfolio, want to take a little off the table while its up due to the buyout possibilities.
Bought Eaton Vance Enhanced Equity Income Fund II (NYSE:EOS) and increased its percentage to 6.1% of the portfolio to generate a little more dividend income.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.6% of portfolio, Johnson and Johnson (NYSE:JNJ) is 8.0% of the portfolio and Boeing (NYSE:BA) is 8.3% of the Portfolio therefore HD, JNJ and BA are now in trim position with L Brands Inc. (NYSE:LB) getting close at 7.8% of the portfolio
I have written individual articles on CAB, JNJ, EOS, LB and HD and other companies in The Good Business Portfolio, if you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, EOS, LB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.