International Paper Co. plans to close its biggest paper mill, displacing 1,100 workers and citing shrinking demand for paper in an increasingly digital world.

 

For workers at the Courtland, Ala., plant, the timing of the announcement could have been better: It comes a day after the company, whose sales and profit have been growing, boosted its dividend 17% and said it would buy back $1.5 billion of stock.

 

With more consumers emailing, paying bills online and storing files electronically, rather than printing out reams of records, the market for copy paper and envelopes has been falling for the past decade.

 

Closing the Courtland plant will slash the company's paper-making capacity by about one-third, or 950,000 tons a year. The bulk of that—about 80%—is uncoated paper, used in copying machines, while the rest of production is shinier, coated paper used for magazines and catalogs.

 

IP executives said they looked at the cost of upgraded production lines to keep Courtland profitable in a shrinking market, and concluded the investment didn't make sense.

 

"This was a very difficult decision to make," said Tim Nicholls, senior vice president for IP's printing- and communications-paper business. "We explored numerous business and repurposing options for the Courtland mill, but concluded that permanently closing the mill best positions us for the future," he added.

 

Workers at the mill were stunned by the company's early-morning announcement that the 42-year-old plant will close by the end of next March.

 

"We knew that production capacity was going to come off the market, but we never dreamed it would be us," said Johnny Phillips, president of a United Steelworkers Union local that represents about 250 maintenance workers at the mill.

 

"The hardest part for me is looking at the youngest members," said Mr. Phillips, 58 years old, who has worked at the mill for three decades. "There aren't many private employers in the area that pay what we get paid." Maintenance workers' hourly wages range from about $20 to $32. Top pay for some other workers at the mill is even higher.

 

The massive complex, stretching across 2,200 acres, sits five miles north of the tiny town of Courtland, and just south of the Tennessee River, which snakes through heavily forested northwest Alabama. The mill is a fully integrated operation in which trailer loads of locally harvested logs enter the mill and leave the plant as packages of copy paper or rolls of paper for printing presses. The mill's wood-pulping operation feeds the four paper-making machines, each of which extend for nearly the length of a football field and operate continuously. Other machines cut and stack paper into piles of 8-inch-by-10-inch packages.

 

With an annual payroll of $86 million, the mill is the largest employer in rural Lawrence Country and has maintained a significant presence in the community since opening in 1971, including supplying free copy paper to the local schools.

 

Mr. Phillips, of the United Steelworkers Union, said Courtland's employees are struggling to reconcile the closure of the mill at a time when the company is earning money and rewarding its investors with higher dividends and share purchases. IP's net earnings for the first six months of the year rose 79% from a year earlier to $577 million, or $1.29 a share. Sales increased 5% to $14.4 billion.

 

"It's hard for us to understand how a mill that has put as much money in their coffers as ours could close and others stay open," he said, referring to other IP mills that produce uncoated paper, containerboard for cardboard boxes and packaging products for consumer goods.

 

The company said closing Courtland had nothing to do with the board's decision to buy back stock or raise the dividend. "These were both independent decisions and were made for the long-term interest for International Paper," Mr. Nicholls said.

 

International Paper accounts for about 25% of the North America production capacity for uncoated paper, second only to Domtar Corp. Closing the Courtland mill is expected to lower the industry's capacity about 8%. Paper makers Domtar, Georgia-Pacific and Boise Inc. have announced production cuts in the past two years.

 

"Everyone else has already done something, so it made sense for IP" to close a paper mill, said Chip Dillon, a paper-industry analyst for Vertical Research Partners. "They're the only one who hadn't shut capacity."

 

International Paper last closed a paper mill in 2010 when it shut its Franklin, Va., mill. After the Courtland mill closes, the company will rely on mills in Eastover, S.C., and Riverdale, Ala., to supply uncoated paper in North America. The company also has paper-making capacity overseas that could provide paper to the U.S. market if demand improves above the company's domestic capacity.

 

Mr. Dillon said the decline in white-paper demand has moderated this year, suggesting a bottoming out. After a 5% decline in 2012, consumption of white paper in the U.S. is off less than 3% since the start of the year. Meanwhile, demand is increasing in Brazil, China, Russia and other developing countries, where International Paper has been adding paper-making capacity.

 

The company plans to record charges of $675 million for the closing of the Courtland plant during the remainder of 2013 and in 2014.