Investment in KP Tissue (KPT.TO)

One of the difficulties that Canadian investors face when trying to build a diversified investment portfolio is that the Canadian stock market is dominated by financial, energy and resource stocks. This makes diversification across sectors extremely difficult. Most investors get their consumer staples exposure by buying US companies, but now that the Canadian dollar is about 10 cents below par, I don’t find that it is worth buying US stocks at today’s exchange rates. To get around this, I’ve tried to add some sector diversification to my stock portfolio by investing in some shares of KP Tissue (KPT-TO). For those who are unfamiliar with this name, here is some company info I pulled from its website:

About KP Tissue Inc.
KP Tissue Inc. (KPT) was created to acquire, and its business is limited to holding, a limited partnership interest in KPLP.  For more information visit www.kptissueinc.com.

About Kruger Products L.P.
Kruger Products L.P. is Canada’s leading manufacturer of quality tissue products for household, industrial and commercial use. Kruger Products L.P. serves the Canadian consumer market with such well-known brands as Cashmere®, Purex®, SpongeTowels®, Scotties®’ and White Swan®. In the U.S., Kruger Products L.P. manufactures the White Cloud® brand, as well as many private label products. Kruger Products L.P. has approximately 2,300 employees across North America and operates five FSC® CoC-certified mills (FSC® C104904), four of which are located in Canada and one in the US.  For more information visit www.krugerproducts.ca.

As a general rule, before purchasing a stock I try to do as much research about the company as possible. In this case, I found that 6 analyst have it rated as a “buy.” One report on company insider buying showed that the Chief Financial Officer (CFO) had recently bought some company shares in the $16 range. One well known financial analyst, Barry Schwartz, a V.P. from Baskin Financial Services, has had KPT as a Top Pick on several occasions on the BNN show Market Call. His view is that this is a $20-$25 stock and that it should increase its dividend as it grows its business in the US.

At the moment the company is unloved for several reasons. First, it had some quarterly losses because of higher pulp and energy prices. It also had a major capital expenditure with the construction of a Through-Air-Dried (TAD) machine that will increase the company’s productive capacity by 20% according to a KP Tissue report. Finally, some investors are not comfortable owning a company that has been created for the sole purpose of owning a portion (approx 16.5%) of another operating company without voting rights. KPT’s unusual structure has some comparing it to an index fund that tracks the fortunes of Kruger Products exclusively.

These are all valid concerns so it is worth looking into them. As far as I can tell, the pulp and energy prices appear to be short-term issues and, if not, these costs can probably be passed on to the consumer as is similarly the case with food and energy. The cap X is an investment in the future of the company that will allow it to produce higher quality private label products. I like to see that the companies I own are investing for long term growth so I view the cap X as a positive move. That said, the US is a very competitive market so I will be watching the quarterly reports and forward guidance statements closely to see how things develop. Finally, there is the question about the company’s structure. Kruger Products has stated that KP Tissue is structured as a limited partnership for tax purposes. Even if KPT behaves like a passive index that tracks the fortunes of Kruger Products, I’m alright with that because, as I mentioned earlier, it is difficult in the Canadian market to find these kinds of companies.

Despite all of these risks, I still find this company appealing because the products that it makes – Cashmere, Scotties, White Swan, Sponge Towels and Purex – are all household names that have brand recognition. Not only does Kruger Products make those popular brands but it is the leading producer and supplier of tissue products in Canada. You’ll find those products being sold at grocery stores and Walmart’s across the country. This is a company that clearly has a very strong market position in Canada and is growing its business in the US.

I added this stock to my portfolio for a few reasons:

First, it is one of only a few consumer staples stocks that are listed on the TSX. Consumer staples stocks fit nicely into my long term investment plan because they tend to be very stable and profitable businesses. Kruger Products L.P. makes toilet paper, tissues and paper towels – products that everyone uses on a daily basis, in good and bad economic times. Most Canadian investors look to the US market for their consumer staples sector exposure because it has many great companies such as Kimberly-Clark (KMB), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Colgate-Palmolive (CL), to name only a few. Unfortunately, as I already mentioned, with the difference in the exchange rate, I would be paying a 10% premium to own those stocks that are already trading at pretty high prices in today’s market.

Secondly, in contrast to where US consumer staples stocks are trading at, I bought KPT at a discount to its book value. The last time I bought a stock that traded at a similar discount to its book value was Suncor Energy back in April of 2013. In that case, I have since been rewarded with multiple dividend increases and a 40% share price appreciation. At the moment KPT is an unloved stock and I don’t expect that I’ll see those gains with it just yet but, as a long term investor, I hope to achieve similar results down the road.

Finally, KPT currently pays a dividend of $0.72 per year, which is a little over a 4.5% yield at today’s price. As I do with all of my stock holdings, I plan to reinvest the dividend to take advantage of compound growth. A nice feature about KPT is that, not only do they offer a dividend reinvestment plan, but they also offer a 3% discount on shares purchased through that plan.

So there you have it, only time will tell if my investment idea works out.