The timber industry is an excellent area to invest. It is unlike any other industry and two lumber stocks stand out from the rest. Everyone is in a unique position to increase profits.
As you can see in the graph below, lumber prices have moved mostly sideways over the past 20 years. However, we saw a big increase last year and prices have remained higher. These increased prices lead to increased sales and should help lumber companies grow.
This trend bodes well for major lumber stocks. And I hand-selected two companies. They both have long track records and also pay dividends. They have rewarded shareholders with a growing body of capital gains over the years.
To start, let’s see why this industry deserves to be considered …
Why lumber companies are a great place to invest
There are some unique properties to owning forests with timber. There is a built-in option which is ideal for investors. When prices are low, forest owners don’t have to cut and process so many trees.
It’s not great for short-term sales, but the trees will continue to grow, as will their potential value. When prices rise, forestry companies can easily produce more wood. Maintaining trees and land may also require minimal maintenance.
It is important to note that not all lumber companies focus on growing and harvesting trees. Some work mainly on the processing and sales side. They don’t have as much control over the supply.
The difference here is between wood and wood products. “Timber” generally refers to intact trees or trees that have been cut down and minimally treated. “Lumber” generally refers to lumber cut to standard sizes for commercial or construction use.
The businesses I have highlighted below have the advantage of owning and managing woodland. In addition to that, they also take care of wood processing. So they are both softwood lumber companies and softwood lumber companies. This vertical integration can help these companies retain a larger portion of the profits.
Main lumber stocks to watch
Weyerhaeuser (NYSE: WY)
Weyerhaeuser is one of the largest forest products companies in the world. This owns over 11 million acres of woodland in the United States. It also manages millions of acres under long-term licenses in Canada.
To achieve this scale, Weyerhaeuser merged with Plum Creek in 2016. The company has grown through acquisitions and organic efforts. And it helped him create economies of scale.
Geographically, its wood is also spread out. This diversification makes it possible to mitigate losses due to localized forest damage. Weyerhaeuser also has a strong balance sheet and cash flow …
The company has approximately half a billion in cash and cash equivalents. This easily gives him the opportunity to meet his debt payments. In addition, its free cash flow more than doubled in 2020 compared to the previous year. This makes perfect sense with the increase in timber prices.
As mentioned, the two companies on this list of lumber stocks also pay dividends. Weyerhaeuser, however, reduced its dividend from $ 1.36 per share to $ 0.51 per share in 2020. There was a lot of economic uncertainty. But the company is doing well and will likely start increasing its dividend again.
Rayon (NYSE: RYN)
Rayonier is not as big as Weyerhaeuser, but it’s still quite diverse. This the company owns or leases over 2 million acres of forest in the United States. It also manages over 400,000 acres in New Zealand.
Rayonier also experienced growth through organic efforts and acquisitions. Since 2014, the company has acquired more than $ 800 million in woodland. This has helped the company increase its sales and profits over the years.
Free cash flow has rebounded a bit in recent years. But in 2020, it hit around $ 100 million. This, along with the cash and cash equivalents of around $ 80 million, make it easy for the business to meet debt repayment.
Higher prices for lumber lead to higher incomes. This puts the company in an even better position to grow and reward its shareholders.
Already, Rayonier has paid a dividend for many years and has kept it at $ 1.08 per share for the past two years. And there is a good chance that we will see an increase in the years to come. You might therefore consider adding this timber stock to your income portfolio.
Invest in REITs
The two companies listed above are real estate investment trusts (REITs). They are set up a little differently from most publicly traded companies. One big difference is that they are required to distribute at least 90% of their taxable income to shareholders.
This requirement means that REITs generally do not have to pay corporate income tax. Since the majority of income is transferred in the form of dividends, investors pay higher taxes on them.
Overall, REITs can be a great way to gain exposure to woodlands, as well as other types of properties. The higher dividend payments attract many income investors.
Opportunities beyond timber stocks
For the reasons mentioned above, woodlots and lumber stocks are excellent for investing. However, there are always opportunity costs.
Marijuana, crypto, and other areas to invest in are growing rapidly. New investment opportunities appear daily. The hard part is sorting through the noise and finding the best opportunities.
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About Brian Kehm
Brian Kehm graduated from Iowa State University with a double major in finance and accounting. After graduating, he went to work for a cryptocurrency company in Beijing. Upon his return to the United States, he began working with financial publishers and also passed the CFA exams. When Brian isn’t researching and sharing ideas online, you can usually find him climbing or exploring the great outdoors.
