Are International Paper and MeadWestvaco more attractive?
Compared to its peers such as International Paper Company (NYSE:IP) and MeadWestvaco Corp. (NYSE:MWV), Domtar is extremely cheap.
International Paper Company (NYSE:IP) trades at $45.10 per share, with a total market cap of more than $20 billion. The market values International Paper Company (NYSE:IP) at 8.75 times its trailing EBITDA. The company is considered one of the biggest global paper and packaging company, operating in many regions around the world including North America, Latin America, Europe, North Africa and Asia. It has 28 pulp, paper and packaging mills, 187 converting and packaging plants and 18 cycling plants. Most of its EBITDA, 55% of the total company’s EBITDA, were generated from the company’s Industrial Packaging segment while the Printing Papers contributed 31% of the total EBITDA in 2012.
Looking forward, International Paper Company (NYSE:IP) will maintain its balanced use of cash, with systematically return cash to shareholders. The company reported that it would maintain sustainable dividend with the rate of 30%-40% of its total free cash flow. International Paper Company (NYSE:IP) pays a decent dividend yield at 2.7% to its shareholders, with the payout ratio of around 54%.
MeadWestvaco Corp. (NYSE:MWV) trades at $34.70 per share, with a total market cap of more than $6.1 billion. The market values MeadWestvaco quite expensively at 9.7 times its trailing EBITDA. The company is also a global packaging company, serving a lot of famous brands in the healthcare, food & beverage, home & garden and tobacco industries. The two biggest income contributor segments were Food & Beverage, with $309 million in profit and Specialty Chemicals segment, with $224 million in operating income in 2012.
The company has been working on an overall overhead cost reduction plan, with the expectation to reduce its annual costs by $65 million to $75 million by the end of 2014. MeadWestvaco Corp. (NYSE:MWV) intends to streamline its operations and consolidate its G&A functions across its operations. In 2013, the company estimated to realize around $25 million to $30 million in benefits from that cost savings plan.
MeadWestvaco Corp. (NYSE:MWV) is also a good dividend payer, offering a 2.9% dividend yield to its shareholders. The payout ratio is quite high at 106%, however. This means that the company pays dividends that are higher than what it has earned in the past twelve months.
My Foolish take
A long-term investor should consider Domtar Corp (USA) (NYSE:UFS) as an investment opportunity. With the ability to generate a consistent cash flow, a conservative balance sheet, the highest dividend yield among its peers, a potential cost and operational synergies from the AHP acquisition and its low valuation, the company could deliver a sweet total return on the market to its shareholders in the near future.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article A Good Investment Opportunity in the Pulp & Paper Industry originally appeared on Fool.com.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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