| Owning timberland is like owning gold. Only better! The value of tree farms and timberland, like gold, is the fact that it's a very nice hedge against inflation for your portfolio. But unlike gold, these assets can also produce very generous dividends. Two of the largest companies that own and manage tree farms and timberlands are Weyerhaeuser Company and Plum Creek Timber Company. |  |
The Timber Industry
There are six primary end-markets for most of the timber harvested in the United States: (1) products used in new housing construction; (2) products used in the repair and remodeling of existing housing; (3) products for industrial uses; (4) raw material for the manufacture of pulp and paper and OSB; (5) wood fiber for energy production; (6) and logs for export.
The timber industry also possesses several unique characteristics that distinguish it from the broader paper and forest products industry. The timber industry, which consists primarily of timberland owners, provides raw material and conducts resource management activities for the paper and forest products industry, including the planting, fertilizing, thinning, and harvesting of trees and the marketing of logs. Logs are marketed and sold either as sawlogs to lumber and other wood products manufacturers or as pulplogs to pulp and paper manufacturers, producers of oriented strand board (OSB), and producers of wood pellets for use in bioenergy.
I believe companies that own timberland possess an attractive asset class that would be a nice addition to any portfolio for many reasons, including the following:
Supply Dynamics. Timber supply can fluctuate based upon a variety of factors. The supply of timber is limited, to some extent, by the availability of timberlands. The availability of timberlands, in turn, is limited by several factors, including government restrictions relating to environmental regulation and land use and alternate uses such as agriculture. The large amounts of capital and length of time required to create new timberlands also limits timber supply. Over the long-term, timber supply increases when modern forestry techniques increase productivity of timberlands and when some marginal agriculture lands revert to timberlands or are planted as forests for conservation purposes. In certain regional markets, log supply can expand when log imports increase relative to log exports.
Demand Dynamics. The demand for timber is directly related to the underlying demand for pulp and paper products, lumber, panel and other wood related products. The demand for pulp and paper is largely driven by general macroeconomic conditions, including population growth, per-capita income levels, and industry capacity. The demand for lumber and manufactured wood products is affected primarily by the level of new residential construction activity, repair and remodeling activity and industrial demand, which, in turn, is impacted by changes in general economic and demographic factors, including population, interest rates for home mortgages and construction loans. The demand for United States timber is also impacted by the amounts of pulp and paper products, lumber, panel and other wood products that are imported into the United States. Significant factors determining the volume of products shipped into the United States by foreign producers are currency valuation shifts as well as tariffs and quotas. Demand for lumber and logs and the volume of products that are shipped from the United States (exports) are also impacted by macroeconomic conditions in foreign markets, primarily China, Canada, Japan and Mexico. In addition to these historically significant factors, the demand for timber may also be affected by emerging markets for wood-based biofuel and bioenergy.
The timber industry also possesses several unique characteristics that distinguish it from the broader paper and forest products industry. The timber industry, which consists primarily of timberland owners, provides raw material and conducts resource management activities for the paper and forest products industry, including the planting, fertilizing, thinning, and harvesting of trees and the marketing of logs. Logs are marketed and sold either as sawlogs to lumber and other wood products manufacturers or as pulplogs to pulp and paper manufacturers, producers of oriented strand board (OSB), and producers of wood pellets for use in bioenergy.
I believe companies that own timberland possess an attractive asset class that would be a nice addition to any portfolio for many reasons, including the following:
- Renewable Resource. Timber is a growing and renewable resource that, when properly managed, increases in volume and value as it grows over time. Larger diameter trees command a higher price than smaller trees because they may be converted to higher value end-use products such as lumber and plywood.
- Predictable and Improving Growth Rates. Predictable biological growth is an attractive feature of timberland assets because it contributes to predictable, long-term harvest planning. The development and application of comprehensive forest management practices continue to improve biological growth rates.
- Harvest Flexibility. Timberland owners have some flexibility to increase their harvests when prices are high and decrease their harvests when prices are low, allowing timberland owners to maximize the long-term value of their growing resource base.
Supply Dynamics. Timber supply can fluctuate based upon a variety of factors. The supply of timber is limited, to some extent, by the availability of timberlands. The availability of timberlands, in turn, is limited by several factors, including government restrictions relating to environmental regulation and land use and alternate uses such as agriculture. The large amounts of capital and length of time required to create new timberlands also limits timber supply. Over the long-term, timber supply increases when modern forestry techniques increase productivity of timberlands and when some marginal agriculture lands revert to timberlands or are planted as forests for conservation purposes. In certain regional markets, log supply can expand when log imports increase relative to log exports.
Demand Dynamics. The demand for timber is directly related to the underlying demand for pulp and paper products, lumber, panel and other wood related products. The demand for pulp and paper is largely driven by general macroeconomic conditions, including population growth, per-capita income levels, and industry capacity. The demand for lumber and manufactured wood products is affected primarily by the level of new residential construction activity, repair and remodeling activity and industrial demand, which, in turn, is impacted by changes in general economic and demographic factors, including population, interest rates for home mortgages and construction loans. The demand for United States timber is also impacted by the amounts of pulp and paper products, lumber, panel and other wood products that are imported into the United States. Significant factors determining the volume of products shipped into the United States by foreign producers are currency valuation shifts as well as tariffs and quotas. Demand for lumber and logs and the volume of products that are shipped from the United States (exports) are also impacted by macroeconomic conditions in foreign markets, primarily China, Canada, Japan and Mexico. In addition to these historically significant factors, the demand for timber may also be affected by emerging markets for wood-based biofuel and bioenergy.
| Weyerhaeuser Company Weyerhaeuser Company (WY), a forest products company, grows and harvests trees, builds homes, and manufactures forest products worldwide. It grows and harvests trees for use as lumber, other wood and building products, and pulp and paper. The company manages 6.4 million acres of private commercial forestland; and has long-term licenses on 13.9 million acres of forestland. It also constructs single-family houses, as well as develops residential lots and land for construction and sale; and master-planned communities with mixed-use property. Weyerhaeuser Company has been elected to be taxed as a real estate investment trust. The company was founded in 1900 and is headquartered in Federal Way, Washington. (Daily Chart) (Weekly Chart) 22 September 2014 Price $31.87 1yr Target $35.91 Analysts 14 1yr Cap Gain 12.67% Dividend $0.88 Yield 2.76% 1yr Tot Return 15.43% Market Cap $16.84 Bil Beta 1.53 EPS (ttm) $1.07 Payout Ratio 82.24% EPS next yr $1.66 P/E 29.79 PEG 5.96 Forward P/E 19.25 Debt/Equity 0.76 ROA 4.40% ROE 9.90% | Plum Creek Timber Company Plum Creek Timber Company, Inc. (PCL) is a publicly owned real estate investment trust (REIT). The trust owns and manages timberlands in the United States. Plum Creek Timber owns 6.7 million acres in the Northwest, Northeast and South - and six wood product conversion facilities in the Northwest. Its products include lumber products, plywood, medium density fiberboard, and related by-products, such as wood chips. The trust also focuses on mineral extraction and natural gas production, communication, and transportation. Plum Creek Timber Company was founded in 1989 and is based in Seattle, Washington. The Timber Company operates independently of Georgia-Pacific LLC as of December 16, 1997. (Daily Chart) (Weekly Chart) 22 September 2014 Price $39.72 1yr Target $44.22 Analysts 9 1yr Cap Gain 11.32% Dividend $1.76 Yield 4.43% 1yr Tot Return 15.75% Market Cap $7.04 Bil Beta 1.01 EPS (ttm) $1.15 Payout Ratio 153.04% EPS next yr $1.46 P/E 34.54 PEG 4.61 Forward P/E 27.22 Debt/Equity 1.90 ROA 3.70% ROE 11.90% |
Weyerhaeuser Company
Weyerhaeuser is one of the world’s largest private owners of timberlands. They own or control nearly 7 million acres of timberlands primarily located within the U.S., and manage another 14 million acres under long term licenses in Canada. They manage these timberlands on a sustainable basis in compliance with internationally recognized forestry standards. They are also one of the largest manufacturers of wood and specialty cellulose fibers products.
The company started out as Weyerhaeuser Timber Company in Washington state in January 1900, when Frederick Weyerhaeuser and 15 partners bought 900,000 acres of timberland. In 1929, the company built what was then the world's largest sawmill in Longview, WA. Their pulp mill in Longview, was built and went into began production in 1931. In 1959, the company eliminated the word "Timber" from its name to better reflect its operations. In 1965, Weyerhaeuser built its first bleached kraft pulp mill in Canada. Weyerhaeuser implemented its High Yield Forestry Plan in 1967 which drew upon 30 years of forestry research and field experience. It called for the planting of seedlings within one year of a harvest, soil fertilization, thinning, rehabilitation of brushlands, and, eventually, genetic improvement of trees.
Weyerhaeuser consolidated its core businesses in the late 1990s and ended its services in mortgage banking, personal care products, financial services, and information systems consulting. Weyerhaeuser also expanded into South America, Australia, and Asia. In 1999, Weyerhaeuser purchased MacMillan Bloedel Limited, a large Canadian forestry company. Then in 2002 after a protracted hostile buyout, the company acquired Willamette Industries, Inc. of Portland, Oregon. On August 23, 2006, Weyerhaeuser announced a deal which spun off its fine paper business to be combined with Domtar, a $3.3 billion cash and stock deal leaving Weyerhaeuser stock holders with 55 percent ownership of the new Domtar company.
In March 2008, Weyerhaeuser Company announced the sale of its Containerboard Packaging and Recycling business to International Paper for $6 billion in cash. The transaction included nine containerboard mills, 72 packaging locations, 10 specialty-packaging plants, four kraft bag and sack locations and 19 recycling facilities.
Weyerhaeuser converted into a real estate investment trust when it filed its 2010 tax return.
In 2013, Weyerhaeuser purchased Longview Timber for $2.65 billion including debt from Brookfield Asset Management. The acquisition added 645,000 acres of timberland to Weyerhaeuser's holdings in Oregon and Washington. In 2014, Weyerhaeuser spun off its home building unit to TRI Pointe Homes in a $2.8 billion transaction. The company also announced its intention to sell its current Federal Way headquarters and relocate to Seattle's Pioneer Square in 2016. Today Weyerhaeuser generates more than $8.50 billion in net sales and employs approximately 13,700 people worldwide.
The company started out as Weyerhaeuser Timber Company in Washington state in January 1900, when Frederick Weyerhaeuser and 15 partners bought 900,000 acres of timberland. In 1929, the company built what was then the world's largest sawmill in Longview, WA. Their pulp mill in Longview, was built and went into began production in 1931. In 1959, the company eliminated the word "Timber" from its name to better reflect its operations. In 1965, Weyerhaeuser built its first bleached kraft pulp mill in Canada. Weyerhaeuser implemented its High Yield Forestry Plan in 1967 which drew upon 30 years of forestry research and field experience. It called for the planting of seedlings within one year of a harvest, soil fertilization, thinning, rehabilitation of brushlands, and, eventually, genetic improvement of trees.
Weyerhaeuser consolidated its core businesses in the late 1990s and ended its services in mortgage banking, personal care products, financial services, and information systems consulting. Weyerhaeuser also expanded into South America, Australia, and Asia. In 1999, Weyerhaeuser purchased MacMillan Bloedel Limited, a large Canadian forestry company. Then in 2002 after a protracted hostile buyout, the company acquired Willamette Industries, Inc. of Portland, Oregon. On August 23, 2006, Weyerhaeuser announced a deal which spun off its fine paper business to be combined with Domtar, a $3.3 billion cash and stock deal leaving Weyerhaeuser stock holders with 55 percent ownership of the new Domtar company.
In March 2008, Weyerhaeuser Company announced the sale of its Containerboard Packaging and Recycling business to International Paper for $6 billion in cash. The transaction included nine containerboard mills, 72 packaging locations, 10 specialty-packaging plants, four kraft bag and sack locations and 19 recycling facilities.
Weyerhaeuser converted into a real estate investment trust when it filed its 2010 tax return.
In 2013, Weyerhaeuser purchased Longview Timber for $2.65 billion including debt from Brookfield Asset Management. The acquisition added 645,000 acres of timberland to Weyerhaeuser's holdings in Oregon and Washington. In 2014, Weyerhaeuser spun off its home building unit to TRI Pointe Homes in a $2.8 billion transaction. The company also announced its intention to sell its current Federal Way headquarters and relocate to Seattle's Pioneer Square in 2016. Today Weyerhaeuser generates more than $8.50 billion in net sales and employs approximately 13,700 people worldwide.
Plum Creek Timber Company
Plum Creek is among the largest and most geographically diverse private landowners in the nation. As of December 31, 2013, they owned approximately 6.8 million acres of timberlands located in 19 states. Management analyzes their timberland to assess and realize the inherent value of its timberland in many different ways, including harvesting the trees, selling the timberland or converting the trees to lumber, plywood and other wood products. The company's timberlands are well diversified, not only geographically, but also by species mix and age distribution and their timberland growth rates vary depending on species, location, age and forestry practices.
They manage their timberlands in two business segments: (1) the Northern Resources Segment consisting of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin; and (2) the Southern Resources Segment consisting of timberlands in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas, and Virginia.
Their Energy and Natural Resources Segment includes their natural resource businesses that focus on opportunities for oil and natural gas production, construction aggregates and mineral extraction, wind power and communication and transportation rights of way.
The Real Estate Segment comprises their sales of higher and better use timberlands and their sales of non-strategic timberlands, including sales of large blocks of timberlands. The Real Estate Segment also includes the development of certain properties both internally and through joint venture arrangements.
The Manufacturing Segment includes two lumber mills, two plywood mills and two medium density fiberboard (MDF) production lines in Montana and one lumber remanufacturing facility in Idaho. The Montana facilities, strategically located near their timberlands, convert logs to lumber, plywood and other wood products, and convert chips, sawdust and wood shavings to MDF.
In December 2013 the Weyerhaeuser Company acquired a significant equity investment in MWV-Charleston Land Partners LLC which consists of 109,000 acres of high value rural lands and development quality lands near Charleston, SC. Beginning in 2014, Plum Creek Timber Company intends to begin providing timber and wood-fiber procurement services to certain customers. These activities will consist primarily of harvesting and selling trees from timberlands that are not owned by them.
They manage their timberlands in two business segments: (1) the Northern Resources Segment consisting of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin; and (2) the Southern Resources Segment consisting of timberlands in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas, and Virginia.
Their Energy and Natural Resources Segment includes their natural resource businesses that focus on opportunities for oil and natural gas production, construction aggregates and mineral extraction, wind power and communication and transportation rights of way.
The Real Estate Segment comprises their sales of higher and better use timberlands and their sales of non-strategic timberlands, including sales of large blocks of timberlands. The Real Estate Segment also includes the development of certain properties both internally and through joint venture arrangements.
The Manufacturing Segment includes two lumber mills, two plywood mills and two medium density fiberboard (MDF) production lines in Montana and one lumber remanufacturing facility in Idaho. The Montana facilities, strategically located near their timberlands, convert logs to lumber, plywood and other wood products, and convert chips, sawdust and wood shavings to MDF.
In December 2013 the Weyerhaeuser Company acquired a significant equity investment in MWV-Charleston Land Partners LLC which consists of 109,000 acres of high value rural lands and development quality lands near Charleston, SC. Beginning in 2014, Plum Creek Timber Company intends to begin providing timber and wood-fiber procurement services to certain customers. These activities will consist primarily of harvesting and selling trees from timberlands that are not owned by them.
Conclusion
Similarly to the analysis and conclusion in the article "Betting On The Farm", I am completely convinced that any investment in either one of these companies has to be entered into as a long term investment. And by long term I mean years, not months. Anyone with a shorter term horizon will most likely become disillusioned and/or disappointed in the short term. That said, this may just be one of the best investments of the decade if executed correctly (a big if!). Timberland traditionally increases in value at a rate similar to the inflation rate so it's a great preserver of purchasing power over time, much like gold is. In addition, as population encroaches on today's timberland, the value of the land increases almost exponentially as its use in converted into lots for homes, businesses, golf courses, etc. And while an investor waits for the value of the land (stock) to increase, each of these companies is throwing off a very generous dividend.
Based on the fundamentals above I intend to initiate a position in Weyerhaeuser over the next few weeks. I will also monitor the stock in Plum Creek Timber Company with the intent to start a position as the fundamentals start to improve. I intend to invest in these companies as excess funds become available and then simply hold these stocks for years. I'll also use the dividends distributed by these companies to reinvest back into additional shares and then let these positions grow naturally. Hopefully in the years ahead I'll look back at these investments and smile. A lot!
Based on the fundamentals above I intend to initiate a position in Weyerhaeuser over the next few weeks. I will also monitor the stock in Plum Creek Timber Company with the intent to start a position as the fundamentals start to improve. I intend to invest in these companies as excess funds become available and then simply hold these stocks for years. I'll also use the dividends distributed by these companies to reinvest back into additional shares and then let these positions grow naturally. Hopefully in the years ahead I'll look back at these investments and smile. A lot!
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