International Paper Company IP announced a 2.5% hike in its quarterly dividend to an annual payout of $2.05 per share. The company has been consistently raising its dividend for 10 consecutive years, in sync with its objective of maintaining a sustainable payout of 40-50% of free cash flow.
The hiked dividend will be paid on Dec 16, 2019, to its shareholders of record at the close of business on Nov 15, 2019. The company also declared a regular quarterly dividend of $1.00 per share for the period from Oct 1-Dec 31, 2019, inclusive, on the cumulative $4.00 preferred stock of the company. This dividend is also payable on Dec 16, 2019, to its shareholders of record at the close of business on Nov 15, 2019.
Notably, the raised dividend will translate to a total payout of approximately $805 million for the company compared with the $789 million of dividend paid in fiscal 2018 and $769 million in fiscal 2017.
This latest dividend hike comes exactly after a year, when International Paper had raised its quarterly dividend by 5.3% to the current annual dividend of $2.00 per share. The company currently has a payout ratio of 50.38%. It has an average dividend yield of 3.65% over the last five years. This compares favorably with WestRock Company, P. H. Glatfelter Company and Neenah, Inc.’s average dividend yield of 3.01%, 2.6% and 1.93%, respectively.
Based on the closing price of $39.31 on Oct 9, the increased dividend offers a yield of 5.21%, higher than the industry’s 3.97% dividend yield. A steady dividend payout is part of the long-term strategy of International Paper to provide attractive risk-adjusted returns to its stockholders. Additionally, decent dividend increases at periodic intervals have been one of the company’s most attractive features.
In the first half of fiscal 2019, International Paper generated $1.8 billion of cash flow from operations. This strong cash flow enabled the company to return about $810 million to its shareholders through dividends and share repurchases during the first half of 2019. As of Jun 30, 2019, cash and temporary investments aggregated $787 million compared with $589 million as of Dec 31, 2018.
Additionally, the company expects to report strong cash generation in 2019. International Paper aims to utilize its sound cash flow by investing in capital projects, reducing its total debt and returning a greater proportion of cash to its shareholders through increased dividend payouts and share repurchases. These projects are expected to have a collective internal rate of return of 20%. Moving forward, International Paper intends to focus more resources on high-return capital projects within its core businesses that can drive additional earnings growth.
However, International Paper is facing challenges due to the impact of tariffs and a strong U.S. dollar in addition to weaker demand on account of the recession in Turkey — a major importer of U.S. containerboard. In the third quarter, price and mix are likely to lower Industrial Packaging segment's earnings owing to export pressure.
In the Global Cellulose Fibers segment, the company expects lower price and mix on account of trade uncertainty and high pulp inventory levels in third-quarter fiscal 2019. Hence, International Paper's third-quarter results will bear the brunt of lower price and unfavorable mix as well as operating expenses at its segments. Further, elevated input costs will suppress margins in the near term.
So far this year, shares of International Paper have dipped 2.6% compared with the industry’s 18.6% decline. The company has a Zacks Rank #5 (Strong Sell).
Stocks to Consider
Some better-ranked stocks in the Basic Materials space are Kirkland Lake Gold Ltd. KL, Kinross Gold Corporation KGC and Franco-Nevada Corporation FNV. These stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Kirkland Lake Gold has an estimated earnings growth rate of 73% for the current year. The stock has appreciated 83% so far this year.
Kinross Gold has a projected earnings growth rate of 165% for the current year. The company’s shares have surged 48% year to date.
Franco-Nevada Corporation has an impressive estimated earnings growth rate of 35% for the ongoing year. Its shares have gained 36% so far this year.
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