What happened
Shares of Domtar Corp. (UFS +0.00%) got walloped today, sinking nearly 13% at one point, after the company announced preliminary fourth-quarter and full-year 2017 earnings. The business reported a sharp loss of $340 million in the final quarter of last year. If that seems like an unusually high number to you, well, your intuition is correct. Unfortunately, it's not a typo, although there's a benign explanation.
The main culprit was a massive impairment of goodwill related to the personal care segment, which has received large investments in recent years as the company attempts to establish a high-margin, high-growth segment. The write-off is a not-so-subtle admission that things haven't worked out as planned.
As of 3:52 p.m. EST, the stock had settled to a 12.5% loss.
Image source: Getty Images.
So what
Domtar's core business is selling pulp and paper for various applications, from specialty gloss papers to high-absorbency materials used in personal-hygiene products. But since selling branded personal-care products allows it to capture more value from its core business, compared to being a supplier of raw materials to external brands, the company has been ramping up its presence in the personal-care market.
Unfortunately, the segment has struggled to deliver profit growth to go along with its revenue increases. That's because Domtar wasn't the only pulp and paper manufacturer that had the idea to branch out into in-house personal-care brands.
The onslaught of competition and ensuing pressure on margins forced the company to pull the trigger on writing off all of its goodwill balance in the fourth quarter of 2017. That amounts to a $578 million impairment of goodwill -- all related to the personal care segment.
While the enormous impairment charge isn't being received well by Mr. Market, the timing actually works out in the company's favor. Domtar partially offset the impairment of goodwill with a $186 million tax benefit from the new tax laws.
Now what
Sure, the impairment charge was enormous and tanked 2017 earnings, but it's important to note that it was a noncash accounting item. That means it had no effect on the company's cash balance or cash flow, which remain strong. In fact, for 2017 Domtar generated $267 million in free cash flow, which allowed management to boost the dividend 4.8% to start 2018.
The dividend increase, combined with a cratering share price, pushed the company's annualized dividend yield to 4.1%. Considering that the business is healthy, stable, and generally devoid of major risks owing to its mature status, income investors may see today's drop as a great long-term opportunity.
