How to Buy Timberland for Under $1,100 Per Acre

Do you think timberland and real estate will preserve value or appreciate over the next 10 years?

If so, Plum Creek Timber (NYSE: PCL  ) is a solid stock worth considering for your long-term investment portfolio. Plum Creek controls one of the largest, most geographically diverse land banks in the world.

Conscious capitalists
Rather than being a slumlord of the forest, Plum Creek's team of foresters are great custodians of the wilderness. They strive to make every acre of land the best that it can be for all stakeholders: community, environment, employees, and shareholders. Outside of buying acreage directly to build your chalet or pitch a tent, Plum Creek could be the next best option. It offers liquidity, and a yield north of 4%.

How does 4.2% sound?
Plum Creek's latest 10-K filing said the company has 177,094,071 shares outstanding. Dividing shares outstanding by 6.8 million, the number of acres it owns, we get 26. The means owning 26 shares of Plum Creek's stock is equivalent to owning one acre of land, excluding other asset and debt considerations. At recent prices, that would be an investment of $1,094.

Average pricing for an acre of timberland peaked in 2007 at about $1,800 -- prices during the low points of the 1990s and 2000s were around $600 per acre.

Symptoms of cyclicality
In addition to selling land, timber REITs such as Weyerhaeuser (NYSE: WY  ) , Potlatch (NASDAQ: PCH  ) , and Plum Creek generate a healthy percentage of revenue from wood products. Therefore, when the housing market is sick and new construction starts slow, these stocks could catch a cold. Knowing that, keep the Echinacea and Vitamin C on hand just in case.

Going once ... going twice ... $1,114 per acre
Potlatch is the fourth-largest timber REIT and has 40,536,879 shares outstanding, according to its latest 10-K filing. Dividing that by the number of acres owned, 1.4 million, we get 29. Excluding debt outstanding and manufacturing assets, Potlatch is selling for the equity equivalent of $1,114 per acre (multiply 29 by $38.43 per share). For that price, it will even throw in a quarterly dividend of $0.35 per share, which calculates out to a 3.6% yield.

Eighty-five percent of its acreage holdings are located in Idaho and Arkansas. The location-location-location portion features 3,000 miles of waterfront property.

The circle of life
Not unlike Plum Creek and Potlatch, Weyerhaeuser's wood products are used in the building and remodeling of homes. In addition, Weyerhaeuser also sells a load of paper products and cellulose fibers. Seedlings grow up to become trees, eventually finding their way into everyday items such as diapers, newspaper, and milk cartons.

Buy Weyerhaeuser now and get a free gift!
Weyerhaeuser announced in November it would merge its homebuilding division, WRECO, with a subsidiary of Tri Pointe Homes  (NYSE: TPH  ) , a builder specializing in new home and community development. The deal is anticipated to close in the second quarter of 2014. Weyerhaeuser shareholders will receive an 80% ownership interest in the combined entity, which is expected to have a market valuation of $2.5 billion. It will be among the 10 largest public homebuilders, with approximately 30,000 lots across California and Colorado.

Going back to its roots
By chopping off WRECO, Weyerhaeuser will be a forestry-focused entity. Excluding any considerations for manufacturing assets and debt, I'm forecasting that Weyerhaeuser's per-acre price will be approximately $2,164. It will be priced at a premium relative to Potlatch and Plum Creek, and rightly so, because of its larger and more diversified wood products businesses. As a stand-alone, the cellulosic fibers segment had $1.9 billion in net sales during 2013.

Also explaining the premium, 2.6 million of Weyerhaeuser's nearly 7 million acres are located in the Pacific Northwest (Oregon and Washington state). Land and timber values there are worth more than acreage in the South, where Potlatch and Plum Creek are overweighted.

Why invest in timberland?
The reasons are many, but I will mention a few. Prices will never drop to zero. Land cannot be printed (not even with a 3-D printer), and we're not making any more of it. Population growth will drive demand for wood products worldwide.

I can tell you that Canada's share of the U.S. lumber market will drop due to the Pine Beetle epidemic. Peak lumber by 2016? U.S. producers will have to pick up the slack. Collect dividends while you wait.

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