Recent Buy

buyI’m always excited to discuss recent equity purchases, but this recent buy is particularly special for me. I’ve never invested in a company like this before, so it’s equal parts exciting and scary all at the same time. We’ll see how I do with this investment over time, as I publicly disclose all of my purchases and sales.

I telegraphed this transaction, as I already revealed my watch list earlier in the month. General Electric Company (GE) was my top stock pick for the month, and I already purchased shares on the 10th. Looking down the list, I decided to stay true to what I wrote about and invest in the company that was listed just below GE. As always, I put my money where my mouth is.

I purchased 60 shares of Orchids Paper Products Company (TIS) on 3/21/14 for $27.29 per share.

Orchids Paper Products Company is an integrated manufacturer of private label tissue products. These products include paper napkins, bathroom tissue, and paper towels. They produce bulk tissue paper, known as parent rolls. They convert these parent rolls into finished products. These products are primarily marketed and distributed through discount stores under customers’ private labels, or to a lesser extent Orchids’s own brand names, such as Colortex, Velvet, Linen Soft, and Big Mopper. These products are sold exclusively to retailers serving the at-home market.

Orchids is not the typical company I invest in. This is a speculative play for me, but I feel comfortable investing here as my six-figure portfolio is now chock-full of high quality blue chip companies. The risk/reward relationship with TIS is certainly more aggressive than the investments I usually target, but I think the potential is great enough for me to take a chance here. Furthermore, the high yield on shares makes the stretch a bit more palatable.

This is a very young company. It went public in July 2005, so historical operational records are rather short. Furthermore, they spent time and capital in 2009 and 2010 expanding operations, which resulted in increased capital expenditures. The company also issued additional shares in 2009, which diluted the float but resulted in additional capital to grow the business. The net proceeds of $14.8 million of the follow-up offering were used to finance a $27 million expansion project. After the share issuance and expansion project, the company initiated a dividend in 2011 to return more cash to shareholders. The company continues to invest in its ability to serve customers and provide dynamic products, and at the end of 2013 announced a project to replace two paper machines and an upgrade to the converting line. While this will come at a price tag of $30.4 million, it’s expected to add approximately $6 million to $8 million in annual EBITDA due to increased capacity (57,000 tons to 70,000 tons) and reduced production costs.

The company owns and operates a paper mill, converting facility, and finished goods warehouse in Pryor, Oklahoma. The paper mill consists of two facilities totaling 162,000 square feet and a 23,000 square foot paper warehouse. The mill generally operates 24 hours per day, 362 days per year. Three days per year are set aside for scheduled maintenance. The converting facility, at 300,000 square feet, converts parent rolls into finished product. Typically, parent roll manufacturing capability exceeds conversion requirements, and as such the company sells some of this unused parent roll into the open market. The company does plan on adding another high-speed, flexible converting line in 2014. The finished goods warehouse was built in 2010, and is 245,000 square feet. Its capacity allows it to hold approximately 600,000 cases of finished product.

From 2010 to 2013 revenue is up from $92.504 million to $116.374 million. This is a compound annual growth rate of 7.96% over this time frame. EPS is up from $0.76 to $1.67 during this same period, which amounts to a CAGR of 30.01%. Pretty solid growth here. While it’s incredibly difficult to get a handle on what kind of growth an investor should expect for the future, consider this: Most of Orchids’s products are distributed within a 900-mile radius of their headquarters in Oklahoma. And of this, most of their sales are concentrated within 500 miles. And this is an area of the country that is not nearly as densely populated as the rest of the country. That leaves a lot of growth potential still out there for this small company. Right now, Orchids concentrates on this small area because they’re one of the few competitors in this area of the country, which gives it certain advantages like lower freight costs. However, in the future they’ll likely have to tap into larger markets for growth.

The company has four primary retail customer relationships. Their four largest customers accounted for 81% of their converted product sales in 2013. Dollar General Corp. (DG) is their largest customer, at  approximately 52% of converted product sales. Family Dollar Stores, Inc. (FDO) is second largest at approximately 11%. HEB became their third largest customer in 2013, and now accounts for approximately 9% of converted product sales. Finally, Wal-Mart Stores, Inc. (WMT) accounts for approximately 9% of converted product sales. Orchids supplies their private label products to over half of its customers’ distribution centers within their cost-effective shipping area. Obviously, another great area for future growth is further retailer relationships, while still maintaining strength within the networks the company already has built.

Orchids also likes to point out that they’ve been growing mid/premium tier products as a % of total cases shipped. Orchids maintains flexibility and diversity within their paper product offerings, and with key investments over the last few years they’ve been able to broaden their product base. They offer premium products through higher quality paper, improved embossing, enhanced graphics, and increased packaging configurations. Shipments of mid/premium tier products as a percentage of total cases shipped increased from 6.8% in 2011 to 37.9% in 2013. This will be an ongoing key area for revenue growth.

Now, let’s get to the nitty-gritty. Shares in TIS contracted by over 18% over the last two trading days of last week. Whoa. What happened here?

Well, it was announced that a securities firm out of New York, Faruqi & Faruqi, LLP, is investigating TIS for potential breaches of fiduciary duty by its board of directors. This investigation comes on the heels of a proxy vote initiated by management on the matter of stock options and grants. Basically, management is holding a special shareholders meeting on April 9, 2014 to discuss certain matters, most prominent of which is the vote to approve a a stock option plan of 400,000 shares to newly appointed CEO and President Jeffrey S. Schoen, as well as a 2014 Stock Incentive Plan, which reserves an additional 400,000 shares of common stock to be issued under the plan, which would depend on certain financial performance metrics pursuant to the plan. Note that this isn’t the first large stock incentive plan for Orchids, with the last such plan being titled the “2005 Plan”. That plan eventually allocated 1,097,500 shares.

Let me state first that I’m not a fan of this compensation plan. While executive compensation is often a prickly subject between shareholders and management, this particular proposal is a bit more egregious because of the rather small size of the company. As of December 31, 2013, Orchids had 8,066,809 shares outstanding. That means the 800,000 shares in question would dilute shareholders’ equity by approximately 10% if all shares are allocated.

However, as was mentioned above the stock took a 18%+ hit in two days on news that was already outstanding. That means there is a 8%+ spread between the potential dilution and the reaction by the emotional Mr. Market. He’s fickle, isn’t he? In addition, half of the shares in question are open to be purchased by Mr. Schoen, which is not set in stone – and would be available depending on certain share price metrics. And this compensation, if passed, would be offered over the course of years as vesting occurs. Furthermore, the vote hasn’t even passed yet.

Okay, with that said let’s get back to the company.

Dividend growth, which is one area of particular concern for me as a dividend growth investor, has been outstanding, if only for the last few years because of a short history. The company initiated a dividend in 2011, as was previously mentioned. The first dividend was $0.10 quarterly per share. The dividend is now $0.35 quarterly per share. This is a CAGR of 64.32% from 2011 to 2013. Now, I don’t expect this kind of growth in the dividend to continue indefinitely. The payout ratio right now is 80.8%, which is quite high, especially for such a young and small company. This is probably where one of the biggest risks in the investment lie, as future dividend growth will be generated by growth in earnings. Any hit to earnings could cause the dividend to be reduced. However, as it stands with current payout, the yield on shares here is fantastic. After the recent hit to the share price, the entry yield on my purchase is 5.13%.

The balance sheet remains well-managed, with a long-term debt/equity ratio of 16.5%. The interest coverage ratio is very high at over 50.

I like TIS here. I think the company has a lot of growth ahead of it. As consumers continue to feel the squeeze of the economy years after the Great Recession first hit, products that represent great value remain in demand. And the company has a lot of growth avenues with which to take. They can expand their sales area, as they primarily operate in a small and sparsely-populated area of the United States. They can also expand their customer base, catering to a wider swath of retail centers. In addition, the company continues to grow its mid/premium tier products. With a market cap of $223 million, the growth potential is outstanding. The company had a record quarter of sales for 4Q 2013, and the new investments in assets should provide solid ROI looking out over the long term.

However, special risks present themselves with such a small company. Their headquarters is situated in an area of the country that is prone to natural disasters like tornadoes. If one of their large customers cuts back on orders, this can have a material effect on the company’s ability to generate increasing revenue and earnings. Competition always remains a key risk, although I think TIS is somewhat insulated due to the value of their products and the area of the country they operate in. As a very small company, interest rate risk is very present, and the company cites a 100 basis point increase in interest rates would result in a pre-tax $146,000 increase to their annual interest expense. They are also exposed to input cost fluctuations, specifically relating to the price of fiber. One last risk is the high capital expenditures the company expects for 2014 and 2015 as a result of aforementioned investments.

Shares in TIS are trading for a P/E ratio of 16.67 right now. That’s a rather attractive valuation considering the growth potential of this company. With high growth, low valuation, and a high yield this is a value stock, growth stock, and a high-yielding stock all built into one. It’s rather unique.

I valued shares using a Dividend Discount Model analysis with a 10% discount rate and a 6% long-term growth rate. I used a rather low growth rate as a margin of safety considering the unique risks with this business. Using this model I see a fair value on shares at $37.10 right now, which implies a heavy margin of safety, especially considering the low growth rate I used. If the company is able to grow to its potential, and grow the dividend in kind, then shares are considerably undervalued here. However, even though I think the valuation is great here, I likely will not average down like I usually would if the stock continues to fall from here. This is due to the rather small size of the company and inherent risks there. As such, it’ll remain a small position for me.

This purchase adds $84.00 to my annual dividend income based on the current quarterly payout of $0.35 per share.

My portfolio now holds 46 positions. This is an increase since the last update, as this was a new investment for me.

I usually like to include analyst opinions on the valuation of a stock, but no major outlets follow this stock. So I have nothing to include with this report.

I’ll update my Freedom Fund in early April to reflect my recent addition.

Full Disclosure: Long TIS, WMT, GE

What are your thoughts on TIS? Too small of a company with too many risks? Outstanding opportunity? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Similar Posts

49 Comments

  1. Hi Jason,

    I have never looked at this company, but seems like you have done a pretty thorough research on it here. It is also nice too see that you are buying shares when they are available for sale.

    Good luck!

    Dividend Growth Investor

  2. The 80% payout would scare me off, but it looks like you have done your homework. Were you planning on buying anyway and the 18% drop is just a bonus?

  3. DGI,

    Thanks for stopping by!

    I definitely did my due diligence here, and paid extra careful attention to all the details since it’s such a small company. It’s definitely a risky play, but I think I have room for it in the portfolio at this stage. However, I wouldn’t want it to be a large position, so it’s not likely I’ll add to it any time soon.

    Thanks for the well wishes. 🙂

    Hope all is well for you as well.

    Best regards.

  4. DivSaver,

    The 80% payout ratio is concerning, and I view that as one of my biggest issues with the company right now. However, I think with continued earnings growth they can continue to cover and grow the dividend. That being said, I don’t expect a big raise this year.

    I was 50/50 on the stock before the drop. I was going back and forth between it and T; T subsequently popped, while TIS dropped substantially. That made my decision easy. I still think it’s risky even after the drop, but I think the margin of safety is large enough to make me comfortable here.

    Cheers!

  5. DM,

    I think that is a helluva pick up. It is very difficult to find 5% yielders with good growth prospects. I will be watching this one closely tomorrow for my weekly sharebuilder purchases.

  6. Thanks Jason for writing in such detail about this company. After investing in the energy market lately and with these all times high, I am keen on investing on such possible opportunities even some risk is there…

  7. Solid pick. 5% is tough to find in consumer goods. Nearly impossible outside of REITs or telecom. I especially like the diversification it brings being an income stock but with (hopefully) more room for growth than some other holdings.

    Since they’re paying out dividends that’s great. The only thing that concerns me is that they don’t appear to be as focused on growth otherwise why pay out 80% of earnings? It seems odd to me for a small company. The only thing I can think of is that they don’t expect to keep growing at a fast rate. Maybe their strategy is to dominate a market up and then sit on it. Nothing wrong with that, since isn’t that what Coke, p&G do?

    I feel the struggle that you may be starting to feel as we’ll. I have over 20 holdings in my taxable account, and I’m always thinking “what could this stock give me that I don’t already have?” It’s a tough one, but good to know there are lots of choices!

  8. Fab,

    Glad you enjoyed the post.

    It’s tough to find value out there with the broader market as high as it is, but I continue to scan for opportunities. This represents me looking outside of the normal box a little, but I think it makes sense here. We’ll see. It definitely has some unique risks.

    Best wishes.

  9. My Dividend Pipeline,

    Hey, glad you like the buy. 🙂

    I tried to really lay it all out here, for better or worse. The value is there, assuming growth can continue. Even with lower growth in the future this stock should provide low double-digit returns here. We’ll see!

    Take care.

  10. ravi,

    I agree that the high payout ratio is odd for a small company. From what I understand after reading through a few annual reports, management was keen on returning cash to shareholders after some serious investments were completed back a few years ago. Long-term CapEx shouldn’t be too high because of the fact that you don’t really need any R&D for a business like this. 2014 and 2015 CapEx will be higher than normal, however, so this could impact their ability to raise the dividend. We’ll see. They could go all this year without raising it again and still pay out more in 2014 than they did in 2013.

    Every new investment for me always comes with the idea of income diversification. I feel like I’ve diversified my income enough now (with 45 other holdings) to where I can take a risky investment on here with TIS. I think the risk makes sense considering the potential reward, but you never know with a small company like this. At any rate, I’ll keep it a small investment.

    Best regards.

  11. Well written post which shows some of the research you put into it. Although it is not a blue chip, the products they make are used everyday. As there products are more than likely cheaper than the brand names, the earnings should grow over time as people become pay more attention to their spending.

  12. Investing Pursuits,

    Thanks! I definitely spent my time with this one. 🙂

    Yeah, their products are pretty much recession-proof…especially the bathroom tissue. And I think the fact that their products are on the low end of the price scale makes them even more recession-proof. You could even perhaps say that they might do better in times of economic stress because of their low prices.

    I think they have a lot of avenues for growth, and even if they only capitalize on some of it this stock should provide solid returns from here. Of course, if the stock doesn’t recover than it’s unlikely the CEO would pick up any of the optioned shares as the strike price is above where it’s currently at. So there’s that as well!

    Best wishes.

  13. DM,

    As always, great read and nice work on the research. A couple of questions for you.

    1. Do you think its odd that the company is trying to grow its operations yet it pays out 80% of earnings? Wouldn’t it be better to retain earnings and invest in growing out operations? The 09-10 expansion project was half paid for by issuing more shares was the balance paid for by taking on debt? If so, why instate a div in 2011 when you can pay down the debt first? Also, the new CEO is probably going to getting options has a form of compensation but if the div wasn’t so high maybe the options wouldn’t be necessary.

    2. Do you know how they are going to pay for the two new paper machines? Makes me think that dividend is going to be in trouble.

    3. Since the company generates all its income from the two facilities running 362 days a year… what if a problem occurs and a mills closes for a week or two? Any setbacks in any one of the facilities could really impact earnings which would affect the dividends.

    4. It does seems like the barrier to enter the paper making business is all that high. Aren’t you afraid of competition hurting earnings?

    Sorry if I am coming off so pessimistic

  14. Certainly you’ve done a ton of research into them, but there are definitely a few red flags. For a small company, that hefty of a cash obligation (dividends) while trying to grow are a bit confusing. Given the ability to scale the business with some additional capital investments, it would seem to make sense that dollars would best be allocated in that area. And, as you’ve stated, the executive compensation looks very bad for a company of this size. Just doesn’t make a ton of sense and certainly calls into question to decision making abilities of the board.

    Either way, you’ve got a great base portfolio now, so a riskier play isn’t going to hurt you too terribly if it sours, and certainly allows you the chance to see if there is some extra upside with the small cap play.

  15. “Their headquarters is situated in an area of the country that is prone to natural disasters like tornadoes.”

    I drive by Mid-America Industrial Park in Pryor a couple times a month. Tornadoes are a fact of life in Oklahoma, but they’re a *very* minor risk if assessing a company’s investment prospects (let alone living here personally).

  16. Congrats on becoming a TIS shareholder. This may prove to be a huge buy for you, especially given the recent drop. I know Mr Market can definitely be a drama queen. I remember several months ago when Walgreen took a huge hit because it was going to acquire a company in Europe, but now the company has had a huge surge since then.

    I’ve been too excited about PEP and (believe it or not) CLX to pay attention to other grabs like TIS. I’ll have to investigate TIS and see what I think. Best of luck with your new purchase!

  17. Frank,

    Great questions there. I don’t have all of the answers, but I’ll do my best.

    1. I agree that it’s odd they pay out a substantial dividend, being such a small company. However, I don’t think it’s necessarily wrong to do so. While they’re going to have the occasional repairs/maintenance/upgrades (as they are this year), overall CapEx on a business that manufactures and sells paper towels, napkins, and bathroom tissue should be relatively low. We’re not talking about a tech company here. Not much changes from year to year when it comes to toilet paper. And operations have been growing pretty substantially over the last few years, even with a dividend. In fact, growth has picked up since the dividend started. Lastly, there is no share buyback program with this company so the only direct return to shareholders via the company is the dividend.

    2. The company didn’t specify exactly how the funding was going to handled in regards to the upgrades and additions. Perhaps they don’t raise the dividend this year, which I wouldn’t really mind. Moreover, the balance sheet could be stretched a bit and they’d still be fine. The interest coverage ratio is extremely high and they have very little debt for a young company.

    3. While significant downtime could harm operations, I think they’ll be fine. They typically have a two week backlog or so, and in addition they typically generate more paper than they need – which they sell to third parties.

    4. Interesting point. I guess my question would be this: Would you be better off taking $223 million and buying TIS, or building the mill, lines, and storage, hiring a sales force, and competing directly with TIS at the dollar stores? I think it would be more likely to see TIS bought out by a bigger player then a smaller player going head to head. Just my opinion looking at the playing field.

    I hope that helps!

    Best regards.

  18. W2R,

    The dividend only looks hefty now, but they’re a really tiny company. I don’t think it will require a ton of capital to scale this business up. A few more stores here and there, a little inflation, and some key changes in operations as they’re doing this year and next could make a big difference. From what I can tell, management is not looking to build this business out super fast. It’s a slow, controlled fire. But it’s pretty tough to find a small business with such potential in an easily understood business with a high yield like this. It’s super unique.

    It’s definitely risky, and I’m not taking that lightly. There’s a chance that the whole business goes under. Or they cut the dividend, or eliminate it altogether. I just think the potential rewards outweigh the risks. We’ll see how it turns out. I’m optimistic. 🙂

    Cheers!

  19. 101 Centavos,

    Hey, thanks for that. I appreciate the eyes on the ground. 🙂

    And I agree with you. The odds are probably rather low, and they have insurance. I remember this point being brought up quite a bit when I talked about TIS last time, so I thought it was important to mention it. It’s a risk, even if it’s a low risk. I personally think there are other, bigger risks to worry about, but it’s not something to completely ignore either.

    Take care!

  20. Spoonman,

    Mr. Market is just completely crazy, right? I was already interested in the company, so the drop just made it easy for me to pull the trigger here.

    PEP is a fantastic company. One of my larger positions, but I hope to increase that at some point. I’m a huge fan of what they’re doing over there. I haven’t looked at CLX in a while, but I do remember being concerned about the balance sheet a bit. Great products, however.

    Cheers!

  21. Alway need a bit of speculation 🙂 I like the fact the stock isn’t on the watch list of many which should equal a bigger payout if it all comes to fruition. Keep up the great work!

  22. Another well researched and written article. I live within the 500 mile radius of the TIS supply line and spend my hard earn dollars at the Dollar General, Family Dollar and Wal-Mart Stores on their products. Nothing fancy or sexy with this company, but hopefully your decision to buy now will reward you for years to come.

    I pulled the trigger on KMI last week on the dip and I’m currently watching OHI, VTR, T and BCE.

  23. I’m glad you’re swinging for the fences a bit with something outside the norm, Jason. I know nothing about paper, except for what the good people at Dunder Mifflin have taught me over the years. But best of luck!

  24. tales,

    I think this one is definitely speculative. It’s unusual for me to invest in something like this, but there are some great qualities here. If they can execute and things work out alright then it’ll be a great investment. Of course, it could go the other way and totally burn me. I’m just hoping management doesn’t get carried away with the dividend and is then forced to cut it. I wouldn’t mind if they don’t raise it again until next year if that means it’s sustainable.

    Best wishes.

  25. luckydog17,

    Thanks! Glad you enjoyed the article.

    There’s definitely nothing sexy about a paper company, but that’s just how I like it. 🙂

    Nice job on KMI. I think that’s low-hanging fruit here, but I’m already loaded up on it. I think KMI should continue to serve us well.

    Take care!

  26. I generally avoid individual stocks, and do the S&P thing. I used to be a stock picker, but here are my thoughts…

    The volume is way low, 60K for the past 3 months.but more recently higher volume. Too many positions leave you with too much to follow. Put a limit order in for each one at 20% gain, but then you lose on the 10 baggers. Have a sell strategy. But it looks like TIS is taking off.

    I read a bunch how Peter Lynch picked stocks, maybe this one will be the next high-flyer. Who knows. This one might go to the moon.

  27. No Nonsense Landlord,

    Nothing wrong with investing in the S&P through an index fund and spending your time elsewhere. That’s a good strategy.

    We’ll see what happens with TIS here. I’m optimistic that they can do well, but at ~1% of my portfolio I won’t be too badly burned if they don’t.

    They key with individual stocks is to diversify so that no one company has an overwhelming effect on your wealth. That’s essentially the key strength behind investing in the S&P 500.

    Best wishes.

  28. A long-term growth rate of 6% seems rather on the optimistic site. If your Dividend Discount Model makes the assumption that TIS grows forever at 6% (> growth of GDP) the whole economy will be TIS at some point.

  29. I think index investing works well in terms of asset allocation, but it gets expensive. Stocks have no recurring fees.

    If you can find ways to invest directly and replicate, more or less, the allocations then you’ll probably make more money in the long run. (0.4% avg fees on $500K is nearly $2K in fees) Plus, index gains are all unrealized until you sell.

    I think index investing is superior to a non-income investment strategy because it’s tough to outperform in terms of capital gains in your portfolio; however, income based strategies are probably best if done individually. I have yet to see funds, or series of funds, that provide similar income return profiles as a basket of individual stocks, mostly because the funds are too diversified.

  30. Christoph, you have a lot to learn about the market. Growing a dividend at 6% can happen with no revenue growth or even declining revenue growth. One example is through share buybacks. If a company has a 10% free cash flow and they put 100% of that into buying back shares, they could raise their earnings by 10% which would be greater than GDP and by your assumption would be impossible to do. A 6% long term growth rate is actually quite conservative.

    I could put down a lot more but basically, learn more about how the capital markets work, it will serve you well. Don’t be stuck in a box thinking greater than 6% growth is impossible because that will outgrow GDP.

  31. Christoph,

    I can see your point, but I disagree and I’ll tell you why.

    A discount model, whether it be via dividends or cash flow, ultimately tries to anticipate all future cash flow and discount that to a current rate. While I understand that technically the value you’re using is for infinity, it’s really not because none of us will be alive that long. So I don’t think the numbers I’m using are all that unrealistic. If you look at many of the companies that have longstanding dividend growth records you’ll see dividend growth in the high single digits for decades on end.

    Will TIS be able to keep up a 6% dividend growth rate until the year 3,000? Will they even be around in 100 years? I have no idea. But the odds of them being able increase the dividend by 6% for the next 30-40 years is very good, assuming they execute business strategies properly.

    Best wishes.

  32. took2summit,

    Great points there. A company can grow the dividend at a healthy clip for years even if sales are flat. IBM is a good example of that. So is Chubb.

    And I agree that 6% as a long-term growth rate is rather conservative, especially for a young company like this that’s just starting out. The only thing holding them back from blockbuster dividend growth for the foreseeable future is the high payout ratio. Without that I’d be overwhelmingly excited.

    Cheers!

  33. I like this pick up for you. Congrats. It’s riskier than usual, but you’ve got a great sized portfolio for a company like this. You’ve clearly done the research and here’s hoping for some outstanding growth ahead. My girlfriend and I shop in dollar stores for these products all the time. I think discount stores have a very bright future regardless of how the economy is doing.

    Thanks for the great article!
    Ryan

  34. With a discount rate of 10% the value of a dividend stream that is currently D$ and grows at 6% in perpetuity is 25*D$. If you assume that the dividend stream grows at 6% for “only” 30 years the value of that dividend stream would be approximately 0.72*25*D$ or more than a quarter less than for perpetual growth. For a dividend discount calculation even 30 year timespans make a relatively big difference if compared to infinity. (For 40 years you would end up with approximately 0.82*25*D$).

    Disclosure: I believe my calculations are right, but I do not guarantee it.

  35. Growth and dividend growth can exceed GDP growth for very long periods of time, but not for eternity. But you do discount to eternity in your calculations and it makes a difference if you do that or discount for an extended period of time (say 30,40 or 50 years).

  36. If you only discount 30 years of dividends, you are essentially saying the face value of the investment will be $zero in 30 years (i.e. the dividends will be your only return and no capital will come back).

    The way you are doing it assumes the stock is worthless at yr 30.

    You are ignoring “terminal value”… i.e. what you could sell the stock for in 30 years.

  37. It is correct that I ignored terminal value in my calculations. Terminal value will depend on the growthrate after year 30 in this case. If you choose that perpetuity growth rate to be 0% the present value of terminal value would be around 3.5*D (still assuming 10% discount rate). If you assume more optimistic growth rate on the order of 3% then the present value of terminal value would be around 5*D.

    So assuming a growth rate of 6% for 30 years and then assuming a terminal growth rate of 3% the present value of all cashflows would be roughly 23 times the current dividend D. This is still about 10% lower than assuming a 6% dividend growth rate in perpetuity (which yields 25*D as the present value). I don’t want to derail the analysis or something. I just want you to be cautious about the margin of safety, which might be lower than anticipated. I am also not trying to judge if TIS is a good investment or not. I have not looked at TIS and have no idea what a realistic growth rate would be for the next few years (much less the next 30 years or in perpetuity).

  38. I agree with your statement. Dividend growth models are a mathematical exercise and depend heavily on the variables (assumptions) used. Small changes compounded over 30+ years will make large differences today.

    It’s why I use a model as a rough estimate, but I usually try to model price/EBIT over the next 5 years to project a range for the stock price, as well as earnings quality trends such as FCF growth and dividend growth history to get an idea of where I think dividends may go in the next 5 years. To me, anything longer than that is just too much of a guess.

    Who knows, in 30 years we may use lasers and magic wands instead of some things we use today. 🙂

  39. Ryan,

    Thanks for the support! Glad you dig the buy. I agree that it’s definitely riskier than usual, but I think I can make a small stretch here. We’ll see how it turns out. I’m optimistic about the long-term prospects, but remain realistic that it could blow up in my face.

    Cheers!

  40. Nils,

    As stated in the article, executive compensation is often a source of contention between common shareholders and executive management.

    I’m not particularly concerned about Coca-Cola as they’ve been shrinking the float for years.

    Obviously, TIS is in no position to be buying back shares at this stage of the game so the dilution with their plan is real. But as long as growth can stay strong I’m a fan of this business.

    Best wishes.

  41. Congrats on your buy, DM. I admire and envy your courage. Wishing you good growth with TIS.

  42. Star,

    Thanks so much. I appreciate the kind words and well wishes. 🙂

    We’ll see how it turns out. It’s definitely a unique investment for me, but I’m optimistic about it. Of course, it could be a total bust. But at ~1% of my portfolio I won’t go broke if it is.

    Thanks for stopping by.

    Take care!

  43. I think this is a good company, but is it a little risky when a single customer represents 52 percent of their sales?

  44. pat,

    I would agree that’s a risk here. However, I don’t know if that’s necessarily their biggest risk. I’m not surprised to see relationships with only a few retailers. This is a very, very small company we’re talking about here. There are many much larger companies out there that lack diversification. The first example that comes to mind is Lorillard Inc. (LO), which generates around 90% of revenues from menthol cigarettes.

    Instead, I’m trying to look at where this company might be in 10 years. I think there’s a lot of potential. However, there’s also a chance that the whole company goes under.

    After evaluating it thoroughly I feel confident that the potential rewards outweigh the risks, but this investment is certainly not for everyone.

    Best regards.

  45. Hey,
    New to your blog, and quite new to investing. I’m still in college and I’ll stick to index-fund investing until I figure things out a little better. Big question, though: how do you find these stocks in the first place? Especially this small company that no one’s heard of?

  46. i heard about –tis— a year ago but forgot about the co. until now.. i suspect they use ”secondary fiber” instead of ”virgin fiber” which is cheaper. their workforce is probably not ”union” either.this is favorable to their cost structure. the riseing cost of of natural gas to run their dryers is a ”negative” unless they hedged with a long term contract.i will check out their product for quality and sheet-count in their rolls . i don’t understand the 80% pay out when they need funds for expanding. if they cut the div. to pay for operations, the price of the stock will drop like a rock.thanks for the research and will be following the stock to view their progress.—b.j

  47. boyd,

    I agree that the high payout ratio is troubling and confusing. However, if they can continue to organically grow earnings at a substantial rate then it shouldn’t be a major problem.

    Let me know what you come up with after you research the company. 🙂

    Best wishes.

Leave a Reply