Remember the old saw about "seeing the forest for the trees"? The forest is the big picture: economic trends and business cycles. Trees, on the other hand, are short-term events. It's only natural to recall a saying like that when you see a quality company such as tree farmer Plum Creek Timber
Here's what happened: Yesterday, Plum Creek informed the SEC of its intention to issue up to $400 million in debt and up to $400 million more in equity at some point in the future. Wall Street, which too often focuses on short-term events -- and often misinterprets even those -- reacted badly to Plum Creek's announcement, dropping its shares nearly 1% on Wednesday's news. I think that was a bad call, and here's why.
First, Plum Creek has not yet decided to issue any new debt or equity. The company clearly stated that it "may," "periodically," issue debt and equity. That's pretty indefinite, and it certainly doesn't indicate a massive dumping of new shares on the market or a sudden undertaking of heavy debt.
Second, even if the company did issue debt and equity, this wouldn't really hurt its balance sheet. Sure, there would be new shares on the books, but in contrast to serial stock option diluters such as Intel
Finally, and most importantly, Plum Creek is looking at the big picture, economically speaking. With interest rates rising, it's probably foreseeing an eventual slowdown in new housing starts and a consequent fall in the demand for, and prices of, lumber. When that happens, the price of woodlands may well fall. That would be an excellent time to purchase distressed assets or smaller competitors, such as Rayonier
To read more about Plum Creek, consider these fine Fool articles:
- Bill Mann describes Plum Creek's value as a defensive stock against a broad market downturn and also as a source of dividend income in both good times and bad.
- Dividend hunter and editor of Motley Fool Income Investor, Mathew Emmert, also likes Plum Creek's payouts.
Fool contributor Rich Smith owns no shares of any company mentioned in this article.