Starting in 2022, resource transactions are hot. From January to early June, the energy sector was up nearly 70% year over year, while some metals and mining stocks in the materials sector were up more than 40% through mid-April. CUT Timber ETF and the broader Materials Sector Fund (XLB) but not so good either.
A bumpy first half in energy and materials
Jump to today, both sectors have fallen sharply since June 7th.
Materials and energy sectors weaken since early June
Not surprisingly, Bank of America Global Research uses EPRF data to point out that as of early July, we just saw the largest outflows from resources stocks (and a record 3-week resource outflows – ie energy and materials stocks).
A large number of resource dramas have been outflowed recently
During all of this volatility, a large-cap materials stock has only been range-bound. International Paper (NYSE: IP) is a $16 billion materials industry container and packaging company. International Paper is one of the world’s largest paper packaging and pulp companies, with sales of more than $19 billion in 2021, according to Bank of America. IP is the largest containerboard and carton producer in North America with a market share of approximately 32%. It is also the world’s largest fluff pulp producer.
The Memphis-based company pays an athletic dividend of 4.4%, according to The Wall Street Journal. Its price-to-earnings ratio is only 9.3 times last year’s earnings, and its valuation here seems attractive to long-term investors. Bank of America expects EPS to grow significantly this year, but then stagnate later in 2023 and 2024 as GDP growth remains lackluster. As a result, IP’s dividend is expected to remain strong, while its free cash flow yield (a measure of the amount of cash available for distribution to shareholders) climbs to nearly 10%.
International Paper: Earnings, Valuation, Dividend Forecasts
According to Wall Street Horizon (WSH), IP recently declared a quarterly dividend of $0.463, the same as its previous distribution. WSH also showed BMO’s confirmed second-quarter earnings date on July 28 and held a conference call later that morning.
International Paper’s second quarter earnings report is about to be released
While valuation, dividend and free cash flow trends look solid, the chart paints a more gloomy picture. Over the past five years, the double top pattern has indicated a generally bearish price action. In the near term, resistance is at $50, while support is at $40. With shares currently trading around $40, there is a near-term bullish pullback to around $50, but traders are cautiously placing stops below the March, June and July lows.
IP Stocks: Double Top, But Tradeable Range
For long-term investors looking for materials industry stocks with low valuations and high dividend yields, IP stock looks good. Short-term traders have defined the level of risk/reward to focus on now. I think the near-term bullish thesis, long stocks below $40, with a stop below $40 and targeting the high $40s, might work.