Financial strength dividend we rate international

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FINANCIAL STRENGTH & DIVIDEND We rate International Paper’s financial strength as Medium, the midpoint on our five-point scale. IP’s debt is rated Baa2/ stable by Moody’s and BBB/stable by Standard & Poor’s. Fitch no longer rates IP’s debt. At the end of 4Q17, IP’s debt/capitalization ratio was 63%, down from 72% at the end of 4Q16 but above the peer average of 48%. IP had cash and equivalents of $1.02 billion at the end of 2017, compared to $1.03 billion at the end of 2016, and debt of $11.2 billion, compared to $11.3 billion a year earlier. In November 2017, the company raised its quarterly dividend by 3% to $0.475, or $1.90 annually, for a yield of about 3.1% — above the peer average of 2.3%. Our dividend estimates are $1.92 for 2018 and $1.98 for 2019. We expect IP to continue to repurchase stock opportunistically, and to announce a new buyback authorization when its current program is completed. MANAGEMENT & RISKS Mark S. Sutton became IP’s CEO on November 1, 2014 and chairman of the board on January 1, 2015. Mr. Sutton was previously the company’s chief operating officer. He succeeded John Faraci, who had served as CEO and chairman since November 2003. Glenn Landau, formerly senior vice president of Finance, recently succeeded Carol Roberts as the company’s CFO. IP has a deep bench of executive talent, and we expect future management changes to be smooth. Executive bonuses are tied to free cash flow, return on investment, and total shareholder return, which we consider appropriate. Investors owning shares in International Paper face a range of risks. In addition to the industry-wide issues of competition, operational efficiency, environmental compliance and potential litigation, the firm has significant debt. Pulp and paper prices can also be highly volatile. COMPANY DESCRIPTION International Paper is a global producer of renewable fiber-based packaging, pulp and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, India and Russia. It produces corrugated packaging products; pulp for diapers, tissue and other personal hygiene products; and printing and writing papers. The company was founded in 1898 and is based in Memphis, Tennessee. VALUATION We think that IP shares are attractively valued at current prices near $62. Over the past 52 weeks, the shares have traded between $49 and $67.
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M ARKET U PDATE - 10 - On the fundamentals, IP is trading at 13.2-times our 2018 EPS forecast, below the midpoint of the five-year annual range of 7.8-21.2 and the average multiple of 17.7 for close competitors such as Westrock Co. (WRK), Packaging Corp. of America (PKG), Avery Dennison (AVY) and Sonoco Products (SON). The price/sales ratio is 1.1, near the top of the five-year range of 0.6-1.2 but below the peer average of 1.3. The price/book ratio is 3.9, in the middle of the five-year range of 2.4-5.5 and below the peer average of 4.2. The dividend yield of 3.1% is above the peer average of 2.3%, indicating value. Our target price of $70 implies a multiple of 14.9-times our 2018 EPS estimate, near the midpoint of the five-year range and below the peer average.
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