Top 2 Lumber Stocks to Invest in the Wood 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.
As you can see in the chart below, lumber prices have moved mostly sideways over the past 20 years. We saw a big spike last year, though, and prices have remained higher. 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 also 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…
Why Lumber Companies Are a Great Place to Invest
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 can also require minimal maintenance.
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” usually 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 companies. 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 has helped it create economies of scale.
Geographically, its timberland is also spread out. This diversification helps mitigate losses from localized forest damage. Weyerhaeuser also has a solid balance sheet and cash flows…
The company has about a half a billion in cash and cash equivalents. This easily gives it the ability to meet its debt payments. On top of that, its free cash flow more than doubled in 2020 compared with the previous year. 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 from $1.36 per share to $0.51 per share in 2020, though. There was a lot of economic uncertainty. But the company is doing well and will likely return to increasing its dividend.
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.
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.
Free cash flow has bounced around a bit over the past few years. But in 2020, it came in around $100 million. This, along with cash and cash equivalents of about $80 million, 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 has held it steady at $1.08 per share for the last two years. And there’s a good chance we’ll see an increase in the years ahead. 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 the majority 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. The higher dividend payments attract many income investors.
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.
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About Brian Kehm
Brian Kehm double majored in finance and accounting at Iowa State University. After graduating, he went to work for a cryptocurrency company in Beijing. Upon returning to the U.S., he started working with financial publishers and also passed the CFA exams. When Brian isn’t researching and sharing ideas online, you can usually find him rock climbing or exploring the great outdoors.