Paper is all around you, and you may not even realize it. It's a huge market, and while some of the paper markets we think of like newsprint may be troubled, there's plenty of demand for paper -- like all those boxes you get in the mail from shopping online. This is why you'll want to take a close look at Kimberly-Clark Corp , WestRock Co , and Rayonier Advanced Materials Inc , which might just be three of the best stocks in paper.
A comfortable babyIf you have a child, you know that keeping them dry and happy is essential. And that means good diapers, which is one of Kimberly-Clark's specialties. It sells the Huggies brand, among others. The absorbent material in diapers is basically a form of paper. A few years ago, the company pivoted toward emerging markets with this business, selling assets in mature markets with low birth rates to focus on the parts of the world where more kids are being born, and fewer parents use disposable diapers. That's a good call, and it should provide long-term growth opportunities.
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But that's not the only reason to like Kimberly-Clark. It's a major player in the adult incontinence market, too. With an aging global population, this side of the business is also likely to benefit. These two businesses, along with feminine products such as Kotex, fall into the Personal Products division, which makes up roughly half of the company's revenue.
And don't forget the company's Kleenex and Scott towels brands, among many others. These may not be high-growth businesses, but they are stable ones in which Kimberly-Clark owns internationally recognized brands that draw shoppers into stores.
The company is mired in a rough stretch. It's top line has been in decline for several years. However,the company's historical return on invested capital has been in the mid- to high-teens, and it has increased its dividend annually for more than a decade. In fact, it increasingly looks like the company is moving in the right direction, with organic growth running at a higher level in 2015 than management had originally expected.
Kimberly-Clark's yield is around 3% recently. If you are looking for a dividend payer with a stable business and a long history of returning value to shareholders via annual hikes, Kimberly-Clark fits the bill.
In the mailAn increasingly important piece of the paper market is packaging for consumer goods, like all the stuff you buy online and have delivered to your door. That's one of WestRock's specialties. About 45% of its business is from product packaging and 50% from corrugated packaging (boxes), so it has a big position in two very important paper markets -- and ones that are likely to see continued growth.
The thing is, WestRock is actually a relatively new company, formed by the merger of MeadWestvaco Corporation and Rock-Tenn Company in mid-2015. Some industry watchers thought that deal was expensive, and the integration didn't go as smoothly as planned. The shares are off some 17% since the transaction closed, which is why this could be a decent opportunity.
The company's year-over-year results in the September quarter(the first full quarter as a combined entity) were below year-ago figures, that was driven by the sale of a business and foreign exchange headwinds. Volumes in the company's core businesses were solid. Moreover, the company is taking steps to bolster its paper business via acquisitions, continued integration synergies from the big merger, and plans to jettison a chemicals business that doesn't fit with its core.
With a lot of moving parts, there's clearly uncertainty in the air. However, the core of WestRock appears to be strong, and when the company works through the merger, it should be an even better company than it is today. Investors willing to take on a little risk might just find the reward well worth it here. And there's a 2.8% or so dividend yield in the mix, too, if you're looking for some income.
ControversialThe last company on the list, Rayonier Advanced Materials, is a big player in the cigarette filter market -- yeah, those are made of paper, too. That might turn off the more socially conscious investor, and perhaps rightly so. But that market, which accounts for about 80% of the company's business, is directly related to paper, and demand is, for better or worse, stable. The problem is that pricing has been an issue of late, with a 7% reduction in sales prices through the first nine months of 2015 in this part of the business.
The fibers company, however, is profitable and generating cash that it's using to pay down debt and streamline the business. It IPOed in the middle of 2014, but it entered the world facing some headwinds. That said, it's doing what it needs to in order to solidify its business and set itself up for growth. And since investors have sent the shares down almost 75% since the spinoff, contrarians should be wondering if now is a good time to get in the door.
Indeed, a lot of that downdraft is likely from the overhang of investors who got the shares just because they owned its former parent. This is a typical pattern exacerbated by the businesses headwinds. Those folks have probably sold at this point, which means investors can start to look toward the future of a business built on reliable demand owned by investors who actually want to be in the shares. The yield is around 2.7%, and the upside potential is worthwhile for those willing to invest in a cigarette-related name that is clearly out of favor.
The best?The "best" is kind of a relative term when it comes to investing. I prefer companies I can buy on the cheap, which is why WestRock and Rayonier Advanced Materials make my list of the three best paper stocks. Yes, they are facing their own demons today, but both have solid industry positions and stable demand. That will eventually shine through, making each a good stock to look at for more than just the contrarians among us. Kimberly-Clark, meanwhile, is a mainstream option that should suit more conservative types well as its stable of well-known brands pushes into growing markets.
The article The 3 Best Stocks in Paper Products originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned but still likes to curl up with a good, old PAPER book. The Motley Fool recommends Kimberly-Clark. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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