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Why Is Domtar Planning to Use Fluff Pulp in Manufacturing?

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Price movement

Domtar (UFS) has a market cap of $2.3 billion. It fell 1.4% to close at $36.97 per share on September 23, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 4.5%, -1.2%, and 2.3%, respectively, on the same day. UFS is trading 0.49% above its 20-day moving average, 0.73% below its 50-day moving average, and 2.3% above its 200-day moving average.

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Related ETFs and peers

The Vanguard High Dividend Yield ETF (VYM) invests 0.03% of its holdings in Domtar. The ETF tracks the FTSE High Dividend Yield Index. The index selects high-dividend-paying US companies, excluding REITS, and weights them by market cap. The YTD price movement of VYM was 10.4% on September 23.

The iShares MSCI KLD 400 Social ETF (DSI) invests 0.03% of its holdings in Domtar. The ETF tracks a market-cap-weighted index of 400 companies deemed to have positive environmental, social, and governance characteristics by the MSCI (Metals Service Center Institute).

The market caps of Domtar’s competitors are as follows:

  • International Paper (IP) — $19.9 billion
  • WestRock (WRK) — $12.2 billion

Latest news on Domtar

In a press release on September 23, 2016, Domtar announced “a plan to optimize fluff pulp manufacturing at its Plymouth mill. The streamlining measures will strengthen the mill’s position in the global fluff pulp markets.”

It added that “the restructuring, which is expected to be completed by mid-2017, includes the permanent closure of the small pulp dryer and idling of related assets, in addition to a workforce reduction of approximately 100 positions. The streamlining process will also right-size the mill to an annualized production target of approximately 380,000 metric tons of fluff pulp. The Plymouth mill will continue to produce Lighthouse Fluff, the benchmark grade for high-quality fluff pulp.”

According to Domtar, “fluff pulp is bleached softwood cellulose fiber used worldwide in absorbent applications such as baby diapers, feminine hygiene and adult incontinence products.”

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Performance of Domtar in 2Q16

Domtar (UFS) reported 2Q16 consolidated sales of ~$1.27 billion, a fall of 3.3% from the consolidated sales of ~$1.3 billion in 2Q15. Sales of its Pulp & Paper segment fell 5.0% and sales of its Personal Care segment rose 5.6% between 2Q15 and 2Q16.

The company’s cost of sales, excluding depreciation and amortization and operating income, fell 0.44% and 37.1%, respectively, between 2Q15 and 2Q16. It reported closure and restructuring costs of $21.0 million in 2Q16, compared with $1.0 million in 2Q15.

Its net income and EPS (earnings per share) fell to $18.0 million and $0.29, respectively, in 2Q16, compared with $38.0 million and $0.60, respectively, in 2Q15.

UFS’s cash and cash equivalents and inventories fell 11.9% and 1.7%, respectively, between 4Q15 and 2Q16. Its current ratio rose to 1.99x and its debt-to-equity ratio fell to 1.12x in 2Q16, compared with 1.97x and 1.13x, respectively, in 4Q15.

Quarterly dividend

Domtar (UFS) has declared a quarterly dividend of $0.42 per share on its common stock. The dividend will be paid on October 17, 2016, to shareholders of record on October 3, 2016. Next, we’ll look at Flowers Foods (FLO).

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