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International Paper Dividend Yield Highest Among Peers

 October 11, 2012 10:23 AM
 


(By Mani) International Paper Co. (NYSE: IP) has increased its quarterly dividend by 14 percent to 30 cents per share for the period from Oct. 1, 2012, to Dec. 31, 2012.

Additionally, the company also declared a regular quarterly dividend of $1.00 per share for the period from Oct. 1, 2012, to Dec.31, 2012, inclusive, on the cumulative $4.00 preferred stock of the company.

Both dividends are payable on Dec.17, 2012, to holders of record at the close of business on Nov.15, 2012.

As a result, there could be an increase in its annual dividend by 15 cents to $1.20 a share. At the current price, this implies a 3.3 percent yield, which is highest among the domestic containerboard producers. This is the fourth increase after the company had slashed its dividend to 10 cents a share from $1.00 during mid-2009.

[Related -7 Stocks Providing Positive Feedback With Higher Dividends]

In June, iStock reported that International Paper has immense potential to raise its dividend given its strong cash flow, making the shares attractive for income seeking investors.

"The increase is in-line with our expectation. Recent events should boost confidence in FY13 cash flows," Deutsche Bank analyst Mark Wilde wrote in a note to clients.

A recent $50 a ton containerboard price hike on its 13MM/ton capacity base should deliver an incremental $650 million benefit. The current dividend hike will result in an incremental outflow of only about $65 million, or 10 percent of the benefit.

[Related -International Paper Company (IP): A Look At Cash Potential]

While the hike isn't a shocker, it does underscore the continued improvement in business performance and cash flow generation at the company. The transformation program begun in the middle of the last decade is delivering tangible benefits.

"IP is progressing towards its mid-cycle dividend target of 30-40% of FCF. We expect IP to generate ~$1.4B of FCF in 2013. Our current estimate assumes only $20/ton in benefit from higher containerboard prices. At the new level, dividend payout will be ~$520-530MM, or ~38% of DB estd FCF," Wilde said.

Most of International Paper's businesses are performing well, and free cash flow potential is robust. At the same time, the company appears to be ahead of schedule in realizing synergies from the acquisition of Temple-Inland, which had 2011 net sales of $4 billion.

"Moreover, with housing markets gradually recovering, cash from the sale of Temple's Building Products division could provide additional upside," the analyst added.

While the global economy remains the biggest issue for International Paper, many investors remain wary about the firm overpaying for acquisitions as it expands its emerging markets footprint.

Memphis-based International Paper is a global paper and packaging company with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include uncoated papers and industrial and consumer packaging, complemented by xpedx, the company's North American distribution company. The company employs about 70,000 people and is strategically located in more than 24 countries serving customers worldwide. International Paper's net sales for 2011 were $26 billion.

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