10 Apr 2016 15:22
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Domtar Corporation (UFS) designs, manufactures, markets, and distributes communications papers, specialty and packaging papers, and absorbent hygiene products in the United States, Canada, Europe, Asia, and internationally.
Last September I did a review of UFS based on their 2014 annual report and from that analysis identified areas of improvement that I would like to see. Recently UFS released their 2015 annual report and lets see how or if they improved.
| Target Improvement | 2015 | 2014 | ||
|---|---|---|---|---|
| Receivables Turnover Rate | 8 | 8.4 | 7.35 | Pass |
| Return on Assets | 7% | 3% | 7% | Fail |
| Gross Profit Rate | 30% | 21% | 21% | Fail |
| Interest Rate Coverage Ratio | 5 | 2.18 | 3.53 | Fail |
Ouch! On the surface all I see is a company maintaining existing cost structures and margins I am disappointed to not even see marginal improvements, with just this alone I would give the UFS management team a grade of C.
Digging into the annual report the only positive I could find was the growth of their personal care products which saw sales increase 24.49% over last year. While not enough to compensate for declining paper & pulp sales it is a step in the right direction from a long term perspective.
Free cash flow, after a $100M dividend payment, was $109M, Still decent enough to keep forward dividends safe and provide some room for growth.
Because of the small positives I would give management an Overall Grade of C+.
My conclusions from last September still stand and UFS management has done nothing to change my outlook.
Last September Conclusions
- Domtar’s current dividend is safe and they have a growth path.
- Moving more into the consumer market will require continued improvements to their financials.
- Domtar would be a good small position to add to your portfolio. Would not initiate a major position until they have more dividend growth history and improved conservative set of financials.
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