Down But Not Out: A Charming Dividend Stock Going for 22.5% Off

Income-focused investors can take advantage of this buying opportunity.

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Canadian stocks have performed well thus far in 2024. As of this writing, the TSX is up 4.30% year to date compared to the 0.69% gain in the same period last year. While eight of 11 primary sectors are in positive territory, some stocks display instability or are undervalued.

Cascades (TSX:CAS) in the paper and packaging industry trades at a discount (-22.57% year to date). The marked-down share price is $9.74, although the 4.93% dividend compensates for the temporary weakness. Income-focused investors can take advantage of this buying opportunity because, besides the attractive yield, the payouts are safe.

Business overview

Cascades will celebrate 60 years of corporate existence on March 26, 2024. The $980.88 million company provides eco-friendly recovery, packaging and hygiene solutions. It produces, converts, and markets packaging and tissue products and serves the commercial, institutional, industrial retail and consumer products industries in North America and Europe.

Management announced in January of this year the launch of new produce basket designs for the produce sector. The new produce baskets with flaps are made from 100% recycled products. They are for produce growers looking for sustainable alternatives to hard-to-recycle packaging.

In February, Cascades announces an operational realignment and optimization of its Containerboard Packaging platform. The company decided not to restart operations in a corrugated medium mill and permanently close two converting plants gradually until May 31, 2024.

Cascades’s strategic investments in the Bear Island mill and its converting network prompted the abovementioned moves. However, Charles Malo, president and chief operating officer of Cascades Containerboard Packaging, said the closures will result in a $61 million impairment and environmental obligation charges in the fourth quarter (Q4) of 2023.

Furthermore, the company will incur approximately $35 million in additional restructuring charges in the coming years.

Financial performance and business outlook

In 2023, sales and operating income increased 3.9% and 21.2% to $1.14 billion and $40 million, while net loss widened to $53 million compared to $14 million in 2022.

Nonetheless, Cascades president and chief executive officer (CEO) Mario Plourde said it was a strong annual performance, given the 48% year-over-year increase in EBITDA (earnings before interest, taxes, depreciation, and amortization) to $558 million. “In the fourth quarter of 2023, our Tissue Papers and Specialty Packaging businesses generated good results, meeting expectations,” Plourde added.

For Q1 2024, Plourde expects the consolidated results to decrease sequentially due to higher raw material costs and slightly lower average selling prices in the Containerboard segment. The softer demand in the fourth quarter will also carry over, and the production levels will be lower to manage inventory.

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Cascades will implement commercial strategies and cost-optimization initiatives to drive long-term profitability while increasing its platform’s agility and market responsiveness. Adding and ramping the top-tier Bear Island facility to the containerboard mill network should enhance competitiveness.

Stable dividends

Cascades’s dividend yield isn’t the highest in the market but is higher than 25% of TSX dividend stocks and the 2% industry average. The low 25.35% payout ratio indicates that the payouts are well-covered by cash flows. Expect the business to turn the corner as economic uncertainty gradually fades.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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