Can I sell You Some Air? Paper & Packaging Bonds

 (February 2012)The Sealed Air Corp (SEE)  does.  Have you ever opened up a box a found it filled with plastic clear pillows filled with air? Then you are familiar with the company.

Today, we will be looking at the paper and packaging industry. Janney, a respected mid-tier brokerage firm, recently upgraded its opinion of bonds from paper and packaging companies to “overweight” – the equivalent of buy.

Paper / Forest Products bonds, a sub-category of Manufacturing are yielding significantly more than investment grade bonds in general and its broad category of manufacturing. (Yield to Worst Data from Yield Book)

Industry Yield To Worst 1 YR ago – Yield To Worst
All Investment Grade 3.31% 4.05%
Manufacturing 2.89% 3.88%
Paper / Forest Products 4.41% 5.25%
  • Paper / Forest Products bonds yield 1.52% more than manufacturing bonds.
  • In the last year, yields have dropped significantly in paper / forest product bonds, roughly in line with the drop in yield for all investment grade bonds, and following the trend for interest rates in general.

Why does Janney think that paper and packaging bonds represent value?

  • Production Capacity is at 90%. While the global economy will not help the industry, they should be able to avoid lowering prices.
  • The industry is capital intensive. As a result lower debt costs should make a big difference to the bottom line.
  • The yields are just too juicy to ignore.

Janney did not recommend any particular companies or debt issues. However, Dortmar (UFS), Sealed Air Corp (SEE), Boise Inc (BZ) have bonds  yielding between 5 -7 %. Please note, these bonds are a little below investment grade.

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