The recovery of Hewlett-Packard Company (NYSE:HPQ)’s stock during the year made me think about paper and paper-related products as an investment. Is the paper industry profitable? I observed from watching the NBC hit show The Office that paper companies are suppose to lose money left and right; with the shift toward emails, paper has become superfluous in the office. Are paper-related products (printers, photo copiers, etc.) or paper worth investing in? Let’s take a look at several companies that are in the paper or paper-related business to answer these pressing questions.
HP
As you well know, Hewlett-Packard Company (NYSE:HPQ) isn’t just manufacturing printers; it also has a wide variety of products and services. The printing segment accounts for nearly 21% of the company’s total revenue, which makes this segment a significant business for HP. A close examination of the company’s revenue divided into its core business segments reveals that the printing segment has the highest operating profitability of all other segments. The chart below shows the company’s operating profitability in the recent quarter of 2013.
Alas, revenue from the printing segment declined in the recent quarter by 5.3%. Revenue in all other segments also fell in the past quarter, so the printing segment’s decline is within the average rate. This means the company’s revenue is still contracting and the high profit margin in the printing segment is among the main reasons HP is still profitable.
The company’s shares have risen sharply, by more than 41% (year-to-date), partly due to its better-than-anticipated quarterly financial report.
Xerox Corporation (NYSE:XRX)
Xerox is another company related to the paper business by producing printers and photo copiers. Shares of the company have spiked by more than 26% in 2013. The company’s decision to raise its dividend payment by 35% so that its yield will reach 2.7% is plausibly among the reasons for the spike in the stock price in recent weeks.
The company’s direct paper sales account for only 4% of its total revenue. This segment’s revenue remained flat during the last quarter. Furthermore, Xerox’s performance during 2012 wasn’t impressive: its revenue fell by 1% and its operating profitability declined from 6.8% in 2011 to 6% in 2011. Thus, Xerox didn’t perform well last year and might not do any better this year. Moreover, its paper and paper-related operations aren’t doing much better. Let’s turn now to an actual paper company.
International Paper Company (NYSE:IP)
International Paper’s market performance isn’t as impressive as HP’s but it still beats the market; shares have risen by 13% (year-to-date). In comparison, the S&P 500 has climbed 8% year-to-date.
Unlike Hewlett-Packard Company (NYSE:HPQ) and Xerox, International Paper’s revenue rose during last year by 6.9%. The company’s profit margin, on the other hand, fell from 5.6% to 3.7% in 2012. It isn’t expecting a higher growth rate in 2013.
Demand is expected to rise by the same rate as global economic growth: a growth of 1% to 2% in the U.S and 3% to 4% in the rest of the world. The company also expects higher operating expenses during 2013, which could cut its profit margin even further.
Despite the decline in profit last year, the board decided at the end of 2012 to raise the company’s dividend payment by 14%. International Paper has raised its dividend payment four times in the past three years. This might be one of the features that makes investing in paper worth considering. Currently, the company’s annual dividend yield is nearly 2.7%.
Final thoughts
Perhaps The Office didn’t mislead me after all. The decline in revenue for leading printer companies and the low profit margin of a leading paper company might make these companies less attractive investments. But these companies still have something to offer to their investors: dividend yields of around 2.6% to 2.7%.
If these companies will again raise their dividend payments, it could further draw investors toward this industry. Finally, I think that a paper company such as International Paper might be considered as a risk-averse investment that will maintain its low profit margin and low (but steady) growth in revenue.
The article Is It Worth Investing in Paper? originally appeared on Fool.com.
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