Domtar Corp. Shares Hit a 52-Week Low

Domtar Corp. (TSX:UFS) has a boring business, but instead of being a diamond in the rough, industry headwinds continue to pressure earnings and cash flow.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Domtar Corp. (TSX:UFS) is the definition of a boring business. It processes wood pulp to produce materials for publishing, personal hygiene products, and other technical purposes. Basically, it makes paper. Shares are down over 20% in the past 90 days, pushing its growing dividend yield up to around 5%. Is this a buying opportunity?

Fundamentals look weak

To many, this looks like a dying industry with projections for traditional paper consumption (around 50% of Domtar’s sales) to decline at around 3-5% annually over the long term. This demand headwind has been slowly deteriorating the company’s revenue base; it has fallen around 2% a year since 2010. Still, management believes they have a plan to move further into specialty and technical papers, which typically come with higher margins. This portion of sales (roughly the remaining 50%), is growing at a higher, but still paltry, rate of 2-4% annually.

While many are looking at shares based on its current 5% dividend yield, that payout looks fairly unsustainable if long-term macro conditions persist. For example, since 2011 Domtar has raised its annual dividend from $1.62 per share to its current $4.34 per share. Clearly, management is aiming to shift its share base to income-oriented investors.

Its free cash flow, however, has been falling nearly every year, from over $1 billion in 2010 to just $221 million in the last 12 months. With dividends costing the company around $100 million a year, it’s doubtful that there’s much room for any further growth.

Will things pick up?

Management is trumping its move into specialty papers, but in reality it can only hope to replace the losses it will likely experience in its core business. At best, its new markets will grow at GDP rates, around 2-4% a year. Half of its sales, however, are falling by 3-5% annually.

The only thing that new acquisitions and facilities will do is increase capital expenditures to keep sales flat. This is easily demonstrated by looking at historical results. In the past five years alone, capital expenditures have doubled to about $300 million a year. Meanwhile, revenues have dipped 8% and net income has fallen by almost two-thirds. Spending more money to make less money isn’t a viable long-term plan.

Last month Citigroup Inc. warned that prices may continue to erode for paper manufacturers. While “producers could potentially increase prices in spring or summer,” writes Citigroup analysts, “these upside risks are balanced by the possibility of further price erosion.”

Long-term margins have gone nowhere but down. In 2011 Domtar’s EBITDA margins were around 20%, and the industry averaged about the same. In 2015 company EBITDA margins fell to just 13% with the industry coming within a similar range.

No matter how Domtar management spins it, paper is a tough industry. Any benefits the company will experience over the next few years are likely to be offset by strong industry headwinds. If you’re interested in sustainable high yields, Domtar is not the answer.

Should you invest $1,000 in Domtar right now?

Before you buy stock in Domtar, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Domtar wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Dip Buyers Could Win Big in Today’s Market Dip

If you want to buy the dip, think long-term. Which is why this TSX stock is a top option.

Read more »