Hiking through a forest may be the last thing you think about when it comes to investments. The woods are probably the place you go to for a break from the financial, and technologically driven, world. But then those green leaves shimmering in the sunlight start to remind you of money. And you wonder, perhaps, if the forest is the perfect place to invest after all.
Is timber a good investment? Let's cut through the underbrush to find out.
There are a dizzying number of wood products, so let's take a view from the canopy to get a grasp on the market.
Source: UNECE Timber Committee, 70th session, October 2012.
Softwood, a majority of the wood consumed, is from conifers, such as pine trees. This type of wood is typically used for structural roles in construction. Hardwoods, such as oak trees, are consumed far less and are usually used for flooring, furniture, and the more finished aspects of housing. Wood, of course, also is used to make newsprint and paper. Measured in metric tons, U.S. newsprint consumption has fallen from 8 million metric tons in 2007 to just 4 million in 2011, while other U.S. paper consumption has fallen from 80 million metric tons to 65 million.
The metric most timber analysts keep their eye on is housing starts. More housing construction means more demand, and housing starts have started to rebound from their recessionary lows.
US Housing Starts data by YCharts.
And with housing trending up, timber stocks have followed.
WY Total Return Price data by YCharts.
Long-term global forecasts from the Campbell Group's "Timber Trends" newsletter, a great resource for following the timber industry, highlight Asia as the largest consumer of pulpwood fiber within five years, while Brazil, China, and Russia will produce the greatest share of new output. Currently, China imports 50% of its softwood from Canada and the United States. In addition, biomass as an energy source could drive growth for wood pellets and wood energy chips, especially in Asia.
The merits of biomass as a clean energy source are debated, especially versus coal, but as it is renewable, countries can use it to meet renewable-energy goals. For example, South Korea hopes to power 11.5% of its needs through renewable energy by 2030 from 4% in 2011 and use 5 million tons of pellets by 2020, versus "less than a few hundred thousand tons used in 2011."
What to look for in companies
If things appear at least cyclically green for the timber industry, what should an investor look for in a company?
Really, the same things in any good company: good management, prudent investments, and a healthy balance sheet. Good management will ensure that equipment will be kept up, that trees will be around to cut, and that there will be money to invest in new land, machinery, and labor.
Specific to the timber industry, the basics include where a company owns land and the breakdown of its revenue from different sectors.
For example, Weyerhauser (NYSE: WY ) owns nearly 2 million acres in Oregon and Washington, giving it easier access to the Chinese market. Potlatch (NASDAQ: PCH ) , meanwhile, has 800,000 acres in Idaho, making any potential trip for its logs to China a bit more costly.
Some companies, such as Pope Resources (NASDAQ: POPE ) , are more exposed to timber and real estate than the likes of Rayonier (NYSE: RYN ) , which earns more of its revenue from its "Performance Fibers" segment that it sells to manufacturers of a variety of goods, from diapers and paint to pharmaceuticals and digital displays.
|Plum Creek (NYSE: PCL )
Source: Companies' most recent 10-Ks or 10-Qs.
In addition, many of the public timber companies are organized as REITs, a designation that gives the companies a special tax status and requires that they pay out at least 90% of earnings as dividends. As a result, dividend yields are usually attractive for the industry.
If you'd rather not bet on a single company, there are a few timber-based ETFs as well: iShares S&P Global Forestry and Timber Index Fund (NASDAQ: WOOD ) and Claymore Beacon Global Timber Index (NYSEMKT: CUT ) . Since the market bottom in 2009, the iShares fund has beaten the S&P 500 by 20%, and the Claymore fund by 50%.
Nature conquers all
Trees have grown for a long while on Earth, and they'll keep growing for longer than humans worry about financial portfolios. The business of timber is dead simple, and there are steady profits if a company does it right. If you're looking for a relatively safe resource asset, consider timber.
If you like getting your hands dirtier than the average Wall Street trader and want other ideas than timber stocks, check out our new free report, which highlights three less-than-luxurious stocks that Wall Street may be overlooking. Just click here to read it now.