Canfor Pulp Fund's current yield of 14.8% looks safe after pulp producers raised prices on northern bleach software kraft (NBSK) pulp. Even better, the company's distributable cash is only going to get bigger, says Daryl Swetlishoff, Raymond James analyst.
"Given current pulp markets we not only view [the current] distribution level as sustainable but see upside," he said in a note to clients.
Canfor Pulp's current yield of 12¢ per month or $1.44 per year represents a 66% payout ratio based on a NBSK price of US$850 per metric tonne and a loonie at US95¢.
Mr. Swetlishoff said Canfor has historically paid out at a 90% ratio, implying a 20% yield or $2.17 per year dividend. But he estimated that the distribution could go even higher.
"Canfor maintains high leverage to NBSK pricing and we highlight that at current spot pulp [of US$880 – US$910/mt] and FX rates our model forecasts Canfor generating $2.75 – $3.29 in annual distributable cash implying 28% – 34% annualized yields," he said.
The analyst raised his rating on Canfor Pulp to Strong Buy from Outperform and increased his price target to $12.50 from $11.50 per share.