Monday, November 14, 2011

Warning: Don't just buy the dividend.

I'm always on the lookout for a good dividend paying stock. The other day I read a blog extolling the virtues of Canfor Pulp Products Inc.

The double digit yield (14.16%) was keeping this dividend-driven investor very happy. Curious, I did some research on CFX.

The following is from the TD Securities Morning Action Notes:
"With a deteriorating pulp market outlook, we expect the [Canfor] Board will reduce the dividend in early 2012. . . . Under our current forecasts (using US$875 per tonne for North American NBSK pulp in 2012), we believe the company can sustain a $0.20-$0.25/share quarterly dividend during 2012. . .

"There has been a significant negative shift in pulp market sentiment in recent weeks – we expect conditions to get much worse before they get better. . . . discounts are widening and spot prices are declining fast. North American spot prices are in the mid-US$700 per tonne range with unconfirmed reports of one-off deals in the mid-US$600 per tonne range. . . .

"Historically, the performance of CFX tracks pulp price momentum (exhibit 2). More recently, the
relationship has decoupled as Canfor Pulp’s dividend has supported the share price. With ourexpectation for alower dividend in 2012, we expect a tighter relationship going forward."

CFX has a target price in the area of $13. If I can pick it up for $9 or less, I might buy a couple of hundred shares. The 20-cent per quarter dividend would then yield about 8.9%. Over the long term, I have problems with owning a pulp products company. It's a business with way too much volatility for my comfort level. I would watch the target price and sell at an opportune moment.

I love a good dividend but a good yield alone is not enough to entice me to buy.

(Note that the investor I'm was talking about at the beginning of this post appears to a bought her shares of CFX at a good discount compared to today's price. It was a good buy for her back then and it may be a good buy for me in the future. But I'm not convinced that it is a good buy for me today.)

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