The next time you get in a car, think about how much work went into making it. From mining for metal to fabricating it to creating the electrical components and plastics to putting it all together. It's an immense feat of human ingenuity. Now step back and think about growing and harvesting trees. It requires effort and skill, but it's in a different league. That's one of the reasons you'll want to look at investing in companies like Weyerhaeuser Co (NYSE:WY) and Plum Creek Timber Co (NYSE:PCL), two of the best forestry services stocks around. And this pair happens to be paying increasing dividends, too.
Keeping the trees happy
Weyerhaeuser is a real estate investment trust (REIT) that owns around seven million acres of timberland in the United States. It also manages around 14 million acres of timberland in Canada and another 300 acres of timberland in Uruguay. From these forests, it harvests trees for sale, produces lumber, and makes fibers.
Trees pretty much grow themselves, so there's not a whole lot of work involved in that piece of the puzzle. However, that doesn't mean there's no skill involved in being a timberland owner. As you cut down trees, you have to plant more (the company planted over 350 million trees between 2010 and 2014). You also need to make sure the forests are healthy as they grow. And you have to make the judgment call on when to harvest. Sure, cutting down the trees gets all the attention, but it's really the last step of a longer-term process.
As one of the largest timberland owners in the country, Weyerhaeuser is simply good at what it does. For example, all of the company's forest land has been certified as sustainably managed by at least one of the many certifying bodies. This means the REIT isn't destroying the resource vital to its financial health, it's managing the forests in a way that will ensure it has trees to harvest tomorrow and for decades into the future. That's just good business.
The big markets for Weyerhaeuser are log sales (approximately 20% of revenues), lumber (50% or so), and fibers (nearly 30%). The first two are largely driven by construction levels, while the last one is less cyclical because fibers get used in things like diapers and milk cartons. Overall, the company's results will ebb and flow over time with housing.
That said, one of the big reasons to buy Weyerhaeuser is its dividend. The REIT's distribution fell along with its top- and bottom-lines after the housing crash. However, the dividend has been on the upswing since 2010, increasing from around $0.15 a share that year to about a $1.00 a share in 2014. And the housing market is still in recovery mode, suggesting that there could be even more income upside to come.
Another name to watch
But Weyerhaeuser isn't the only company that owns forests in this country. You should also take a look at Plum Creek, another timber REIT. The company owns around six million acres of land across various regions of the United States. The biggest difference between the two REITs is probably that Weyerhaeuser has a bigger presence on the West Coast, which is a very good growing region, and Plum Creek has a heavier weighting to the southeast. Don't dismiss Plum Creek for that reason, though.
Like Weyerhaeuser, Plum Creek takes great pride in its sustainability efforts; it is a responsible steward of its forests. And while it is more exposed to Eastern timber lands, which are less prolific than those on the West Coast, the company likes the region because of population growth and the increasing use of wood as a sustainable fuel for power plants. (The East Coast is simply closer to key European power markets than the West Coast, which, just for reference, benefits from being closer to Asian demand for lumber exports.) In other words, there are benefits to each location.
About 60% of Plum Creek's harvest in 2014 went toward saw logs, which are used to make lumber, or sold as is. The rest went toward pulp wood, which is what wood fiber products are made from. That said, the company also generates significant revenues from selling land for use as home sites and is building an energy business, offering land for wind turbines and oil and gas drilling, among other things. So, there are some interesting moving parts that you'll want to explore in more detail.
Like Weyerhaeuser, Plum Creek's dividend has been increasing of late, but at a much slower pace. There's a difference here, though. Plum Creek didn't cut its distribution during the down turn, it held it steady for five years. Although Plum Creek's dividend growth rate may be comparatively small over the last few years, the fact that it wasn't forced to cut the payout in the downturn may be particularly interesting to more conservative investors.
Forestry services are the key
The thing to remember with both Weyerhaeuser and Plum Creek, however, is that their ability to maintain what they own is the key to their futures. The forests are their factory floors, even though they don't actually have to do much work to "make" the trees. So, if you are looking for direct access to a forest services company, Weyerhaeuser and Plum Creek, with their opposite coast weightings, are really two of the best options around. That's particularly true for income seekers, since these REITs are, by design, spitting out healthy and growing income streams.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.