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Five Paper and Packaging Firms that Could Declare Special Dividend

 November 29, 2012 01:59 PM

(By Mani) KapStone Paper and Packaging Corp. (NYSE: KS) announced a $2.00 a share special dividend to its shareholders. This dividend is payable on Dec.20 to shareholders with a record date of Dec.10. On its current share count, this would imply a total payout of $95 million.

Given the uncertain tax environment, the special dividend is a tax efficient method to return a portion of the significant gains that it has generated. After the dividends are paid, KapStone's balance sheet will remain very strong with an EBITDA to debt leverage ratio still below two times. In addition, the company amended its senior secured credit agreement to lower its interest pricing grid by 25 bps.

[Related -Costco Wholesale Corporation (NASDAQ:COST) Q1 Earnings Preview: Membership Fees Or Bust]

KapStone's balance sheet remains solid, and the $450 million accordion feature provides ample flexibility to pursue growth opportunities.

"Given the uncertainty around the dividend tax rate, we're not surprised by the announcement and think it is a prudent move. We could see further announcements during the next few weeks," Deutsche Bank analyst Mark Wilde wrote in a note to clients.

Among others in the industry, Packaging Corp. of America (NYSE: PKG), International Paper Co. (NYSE: IP), Domtar Corp. (NYSE: UFS), Ball Corp. (NYSE: BLL), Crown Holdings Inc. (NYSE: CCK) appear to be potential one-time dividend candidates.

[Related -Costco Wholesale Corporation (COST) Q4 Earnings Preview: What To Watch?]

Packaging Corp. of America has strong cash flows, which are expected to be about $250 million in fiscal 2013. In addition, the company has solid balance sheet and healthy industry fundamentals.

International Paper's businesses are performing well, aided by higher containerboard prices. The sale of Temple's Building Products division could generate $575 million to 625 million in cash.

Domtar has done a solid job of managing a declining market. They have been prudent in utilizing cash flows - returning a substantial portion via share repurchases and dividends.

"DB estimates 2013 cashflows (of Domtar) to be between $370-400MM. Net/debt to 2012e DB EBITDA is less than 1.0x," Wilde noted.

Meanwhile, Ball Corp. and Crown Holdings have done an impressive job of generating relatively stable margins and returning cash to shareholders via share repurchases and dividends. Ball Corp. continues to expect fiscal free cash flow (FCF) to be "at least" $500 million, while Crown has pointed to FCF guidance of "at least" $325 million.

A host of companies in various sectors started declaring special dividends in order to avoid higher taxes next year. Retailer Costco Wholesale Corp. (NASDAQ: COST) declared a special cash dividend of $7 per share and casino operator Las Vegas Sands (NYSE: LVS) board approved a $2.75 per share special cash dividend on its outstanding common stock.

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