Is International Paper the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether International Paper (NYSE: IP  ) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at International Paper.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $10.1 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 2.20 Fail
  Worst loss in past five years no greater than 20% (61.8%) Fail
Valuation Normalized P/E < 18 8.62 Pass
Dividends Current yield > 2% 4.6% Pass
  5-year dividend growth > 10% (6.9%) Fail
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% 23.9% Pass
  Total score   5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With five points, International Paper rolls out part of what conservative investors like to see in a stock, but it isn't a perfect fit. A healthy dividend and attractive valuation are points in its favor, but the stock has been extremely volatile in recent years.

International Paper makes a variety of paper products, ranging from copier paper and packaging materials to paper towels and plates. After a long rough patch, industry conditions have improved lately, with International Paper and MeadWestvaco (NYSE: MWV  ) seeing strong year-over-year jumps in profits. Fellow competitor Boise (NYSE: BZ  ) has also seen profitability rise over the past two years.

Nevertheless, the industry is competitive, and consolidation has become an important trend. Earlier this year, RockTenn (NYSE: RKT  ) bought fellow packager Smurfit-Stone. In an attempt to compete more efficiently, International Paper made a bid for shipping-box maker Temple-Inland (NYSE: TIN  ) earlier this year. After a series of back and forth moves, the companies finally agreed to the combination, which could bring synergy advantages worth $300 million annually by 2013. Some investors, including value investor Prem Watsa, thinks that AbitibiBowater (NYSE: ABH  ) could be the next acquisition target.

For retirees and other conservative investors, the real sticking point may be the company's dividend, which International Paper cut by 90% at the worst of the financial crisis two years ago. Since then, the company has pushed its most recent quarterly payouts above its pre-crisis level, and if that trend continues, then it should make shareholders happy. Still, the stock's major volatility makes it clear that you need to have a tolerance for risk to include International Paper in your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add International Paper to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Rock-Tenn. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2011, at 12:52 PM, vulture6468 wrote:

    No it is not without all of the above analysis. Why would anyone retire with a cyclical stock. Further, just look at the price chart. Stock is $10-$15 below where it was 10 years ago. Betting on a return to that level and then growth beyond that over time is just that -- betting.

  • Report this Comment On October 06, 2011, at 12:59 PM, toddleem wrote:

    The cardboard market is indeed consolidating and throws off a lot of free cash flow. The biggest problem with IP is that they are large in the coated free sheet market-a market that like camera film, will be very much smaller in the next decade.

    The article mentioned Rock Tenn-why not this stock. They throw off cash, they are a low beta way to play international demand for packaging and their management is excellent.

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