Incorporated in 1898, International Paper Company (IP - Get Rating) in Memphis, Tenn., is a global leader in manufacturing sustainable fiber-based packaging and pulp products. It has facilities in North America, Latin America, North Africa, and Europe. The company offers corrugated packaging materials that protect and promote goods, and facilitates global commerce and pulp for diapers, tissue, and other personal hygiene items that promote health and wellness.

The company’s shares have gained 14.4% in price over the past year and 6.9% year-to-date to close yesterday’s trading session at $53.16. Its strong top-line growth, driven by improvements across all business segments, has driven the stock’s rally this year.

IP ’s $1.85 forward annual dividend payout translates to a 3.48% yield versus the 1.81% industry average. This compares to its 4.05% four-year average dividend yield. IP’s dividend payouts have grown at a 2.6% CAGR over the past three years.

The stock is currently trading 14% below its 52-week high of $61.81, which it hit on June 4, 2021.

Here’s what could shape IP’s performance in the near term:

Share Repurchase

This month, IP’s board of directors approved a $2 billion repurchase of its outstanding common stock. The new authorization is in addition to the $1.3 billion remaining from a prior buyback authorization as of the third quarter. Its share repurchases are an indication of IP’s robust financials and strong free cash flow generating capabilities.

Industry Tailwinds

A growing consumer awareness of sustainable packaging, and the rigorous restrictions set by various environmental protection authorities (regarding the use of environmentally friendly packaging goods) are driving the paper packaging industry. The rapid growth of online shopping and on-demand delivery services has increased the use of cardboard and paper bags. In addition, the fundamental shift in corporate standards, political laws, trade restrictions, and consumer tastes has resulted in a paradigm shift in the packaging sector toward eco-friendly solutions. In fact, the global paper packaging market is projected to grow at a 4.5% CAGR  during 2020 – 2026.

Robust Financials

During the second quarter, ended June 30, 2021, IP’s net sales increased 15.4% year-over-year to $5.62 billion. Its net income increased 62.4% year-over-year to $432 million, while its EPS grew 81.7% from the prior-year quarter to $1.09. In addition, the company’s cash and temporary investments grew 18.7% for the six months ended June 30, 2021, to $706 million.

Discounted Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 11.6x, which is 21.2% lower than the 14.7x industry average. Also, its 0.96x forward Price/Sales multiple is 34.7% lower than the 1.46x industry average. Also, IP’s 1.24x forward EV/Sales  is 32% lower than the 1.83x industry average.

The stock’s 7.63x forward EV/EBITDA multiple is 4.1% lower than the 7.95x industry average.

Impressive Growth Prospects

A $5.47 billion consensus revenue estimate for the next quarter (ending December 2021) indicates a 4.4% improvement year-over-year. Analysts expect IP’s EPS to rise 90.7% from the same period last year to $1.43 in the next quarter.

The Street expects IP’s revenues and EPS to rise 6.4% and 67.5%, respectively, year-over-year to $21.9 billion and $4.69 in its fiscal year 2021. In addition, IP’s EPS is expected to rise at a 25.8% CAGR over the next five years. Also, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in three of the trailing four quarters.

POWR Ratings Reflect Solid Prospects

IP has an overall B grade, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. IP has a B grade for Growth and Quality. IP’s solid earnings and revenue growth potential is consistent with this grade. And its 7.1% ROC, which is 3.7% higher than the industry average, is in sync with its  Quality grade.

Of the 11 stocks in the A-rated Industrial Paper industry, IP is ranked #4.

Beyond what is stated above, we have graded IP for Stability, Value, Sentiment, and Momentum. Get all IP ratings here.

Bottom Line

IP is a leading paper and packaging company with an impressive product portfolio and an international market presence. So, considering the company’s solid fundamentals and remarkable dividend history, we think it could be an excellent addition to your dividend portfolio at the current price level.

How Does International Paper Company (IP) Stack Up Against its Peers?

IP has an overall grade of B in our proprietary rating system. This rating is superior to its peers in the Industrial – Paper industry, such as Suzano S/A ADR (SUZ - Get Rating), Clearwater Paper Corporation (CLW - Get Rating), Domtar Corporation (UFS - Get Rating), which have  C (Neutral) ratings.

IP shares were unchanged in premarket trading Friday. Year-to-date, IP has gained 9.86%, versus a 22.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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