Don’t Scoff At This Fluffy Dividend
When searching for the next great dividend stock to invest in, International Paper isn’t at the top of most investors’ lists, but maybe it should be.
While it might not be a household name with a hot new product on the market or some groundbreaking developer of an innovative medical treatment, International Paper offers a dividend that is not to be scoffed at — the company’s numbers speak for themselves in this instance.
But what exactly does International Paper do, and is the company’s dividend even sustainable? Will the company’s stock go up anytime soon, or should investors purchase it simply because of the dividend yield? Not to mention, what are the risks associated with this dividend? Let’s dive in.
IP: A Global Leader in Renewable Paper Products
International Paper, also known as IP, is one of the planet’s leading producers of renewable and fiber-based paper products, such as packaging and pulp. International Paper has operations across the globe, providing more than 150 countries and over 25,000 customers with their essential paper products.
Late last year, International Paper decided to concentrate on some new initiatives, such as industrial packaging. In order to do so, the company split its traditional paper printing business into a separate, publicly-traded company called the Sylvamo Corporation.
Today, International Paper now runs two segments:
- industrial packaging; and
- global cellulose fibers.
When looking at IP and the Sylvamo Corporation combined, the two segments make up around 75 percent of last year’s revenues.
Is International Paper’s Dividend Sustainable?
But, of course, we’re here to investigate International Paper’s dividend.
Between the years 2010-20, the company’s dividend has grown steadily. And while IP’s dividend took a 10 percent haircut in October, the truth is that this cut was not a traditional cut in the usual sense — It was done to manage the company’s capital that was being carried over to investors through their shares in Sylvamo.
International Paper’s current dividend has a yield of 3.88 percent. With a $100,000 investment, that would produce $3,880 in dividend income annually. Taking this into consideration alongside IP’s $2 billion in stock buybacks that were announced back during the company’s DPS declaration, International Paper should produce a healthy ROI for investors both in terms of share price appreciation and dividend income in the years to come.
What Is The Payout Ratio For International Paper’s Dividend?
When trying to determine the payout ratio for International Paper’s dividend, there are a few different approaches you can take. You can look at it based on the trailing year of earnings, which would be a payout ratio of 40.57 percent.
Or you could look at it through the lens of this year’s estimates, which would be 44.15 percent. You could even consider next year’s estimates, which would be a payout ratio of 40.75 percent.
Last but not least, you could simply consider the company’s cash flow, which holds a payout ratio of 30.63 percent. No matter which angle you prefer, there isn’t a bad number in the bunch.
Will IP Stock Go Up?
While we’re looking to invest in International Paper based on its dividend alone, it’s worth considering whether or not IP stock will go up based on valuation — after all, this is the sort of thing that could have a major impact on a company’s dividend.
Looking at forecasts from financial analysts for the next twelve months, bullish analysts expect to see the company’s price per share rise to as high as $78 per share. Bearish analysts, on the other hand, predict IP’s price per share will drop down to $43.
When we perform a discounted cash flow forecast analysis on International Paper, the fair market value comes in at $51.31 per share, suggesting that investors will grow their wealth to a small extent from share price appreciation.
Will Debt Hurt The IP Dividend?
Without question, the greatest risk that International Paper’s dividend faces has to do with the company’s debt.
This debt poses a serious threat to the company’s dividend’s sustainability in the long run, especially if it were to increase. As of the latest balance sheet at the end of the company’s most recent quarter, IP has a whopping $8.2 billion in long-term debt. While this is at face-value a threat to the sustainability of the company’s dividend, it’s worth noting that IP did pay off $235 million of that debt in the third quarter of 2021. Indeed, $21 billion of revenue and $31 billion of assets suggests there is little to concern investors.
The Bottom Line: Don’t Scoff At This Fluffy Dividend
If you’re in search of a company with a solid dividend and a promising annual yield then International Paper offers balance to a portfolio that might be skewed with high growth stocks, penny stocks, crypto or other more volatile holdings. With a dividend yield approaching 4 percent, there’s no need to be dismissive of this paper company’s stock — even with the debt IP Is harboring.
All in all, the company’s dividend appears sustainable and would be a solid choice for those retail investors simply looking to buy based on dividend cash flow alone. Everything else positive about IP is merely an added bonus.