Top 2 Lumber Stocks to Invest in the Timber Industry
The wood industry is a great area to invest. It’s unlike any other industry and two lumber stocks stand above the rest. Each is in a unique position to push profits higher.
In the past few years, lumber prices have moved much higher. Last year, we saw a big spike and it pulled back mid-year. Although, prices have climbed higher again to start 2022. These increased prices are leading to higher sales and should help lumber companies grow.
This trend bodes well for the top lumber stocks. And I’ve hand-selected two companies. They both have long track-records and pay dividends. They’ve rewarded shareholders with a growing pile of capital gains over the years.
To start out, let’s look at why this industry is worth considering…
Investing in Lumber Companies
There are unique properties to owning forestland with timber. There’s a built-in optionality that’s great for investors. When prices are low, forestland owners don’t have to cut down and process as many trees.
That’s not great for short-term sales, but the trees will continue to grow, as will their potential value. When prices push higher, timber companies can easily produce more wood. Maintaining the trees and land also requires minimal work.
It’s important to point out that not all lumber companies focus on growing and harvesting trees, though. Some work primarily on the processing and selling side. They don’t have as much control over the supply.
The difference here is between timber vs. lumber products. “Timber” usually refers to intact trees or trees that have been cut and minimally processed. “Lumber” refers to wood that’s cut to standard sizes for commercial use or for construction.
The companies I’ve highlighted below have the benefit of owning and managing timberland. On top of that, they also deal with processing the timber. So they’re both lumber and timber stocks. This vertical integration can help these companies keep more of the profits.
Top Lumber Stocks to Watch
Weyerhaeuser (NYSE: WY)
Weyerhaeuser is one of the largest forest product companies in the world. It owns more than 11 million acres of timberland in the U.S. It also manages millions of acres under long-term licenses in Canada.
To achieve this scale, Weyerhaeuser merged with Plum Creek back in 2016. The company has grown through acquisitions and organic efforts. And this helped it create economies of scale.
Geographically, its timberland is spread out. This diversification helps mitigate losses from localized forest damage. Weyerhaeuser also has a solid balance sheet and cash flows…
The company has over $2 billion in cash and cash equivalents. This easily gives it the ability to meet its debt payments. On top of that, its annual revenue reached $10.2 billion in 2021. That’s up 35% from the previous year of $7.53 billion. This makes sense with the increase in lumber prices.
As mentioned, both companies on this lumber stocks list also pay dividends. Weyerhaeuser cut its dividend a few years ago but it still comes in at to a 2.4% yield today. There is still a lot of economic uncertainty. But this timber stock is doing well and will likely push the dividend higher in the years ahead.
Rayonier (NYSE: RYN)
Rayonier isn’t as big as Weyerhaeuser, but it’s still well diversified. This company owns or leases more than 2 million acres of timberland in the U.S. It also manages more than 400,000 acres in New Zealand, making this an excellent timber stock for international exposure.
Rayonier has also been growing through organic efforts and acquisitions. Since 2014, the company has acquired more than $800 million worth of timberland. This has helped the company increase sales and profits over the years.
Revenue reached $1.11 billion in 2021. That’s up 29% from the previous year of $860 million. This has helped put Rayonier in a better financial position as cash and cash equivalents has climbed to $430 million. This allows the company to easily meet its debt payments.
Higher lumber prices are leading to higher revenue. This is putting the company in an even better position to grow and to reward shareholders.
Already, Rayonier has paid a dividend for many years and held it steady at $1.08 per share for the past few years. But with the higher lumber prices it increased its dividend recently to $1.14 per share. So you might want to consider adding this lumber stock to your income portfolio.
Investing in REITs
Both companies listed above are real estate investment trusts (REITs). They’re set up a bit differently from most companies that trade publicly. One big difference is that they’re required to distribute at least 90% of their taxable income to shareholders.
This requirement means REITs typically don’t have to pay any corporate income taxes. Since most of the income is passed along as dividends, investors pay higher taxes on them.
Overall, REITs can be a great way to gain exposure to timberland, as well as other types of properties such as data centers. The higher dividend payments attract many income investors and provide a great source of passive income.
Opportunities Beyond Timber Stocks
For the reasons mentioned above, timberland and lumber stocks are great to invest in. There are always opportunity costs, though.
Marijuana, crypto and other areas to invest are growing rapidly. New investment opportunities are showing up daily. The tough part is sorting through the noise and finding the top opportunities. And here at Investment U, that’s what we strive to do. Our financial analysts continue to find top opportunities…