In recent years, one of my biggest investment obsessions has been land. And with good reason... According to a recent S&P report, a $10,000 investment in timberland returned $159,000 over the last 20 years. That's nearly twice the return of the stock market.
S&P recently launched a new 25-stock Timber and Forestry Index. Back-tested to 2003, the returns have been an astonishing 17.2% a year. This includes some tough times, as demand for lumber and building products has shrunk in recent years.
So what's so great about timberland as an investment? The list is ridiculously long...•
It's a sustainable asset that will keep giving returns for infinity.
• It has no correlation to the stock market.
• It has less volatility than the stock market.
• "Stumpage" (all the wood from the tree) prices have beaten inflation by about 3% a year for nearly a century.
• Unlike businesses, trees easily compound their growth at about 6%-8% per year.
• Supply and demand... Fewer trees and more people could lead to higher prices.
• Valuable real estate. Eventually, some timberland acres turn into expensive neighborhoods.
• New demand. For the first time in history, big institutional investors are getting into timberland.
In short, timberland is just about the Holy Grail of the investment world.
If you haven't already taken a position in timber, it's not too late. I believe the next years will give you returns similar to the past 20.
Here's how...
Why Trees are Such a Good Investment
America's wealthiest individuals have been accumulating land for decades.
Ted Turner, for example, now owns 2 million acres. Jeff Bezos (who started Amazon) now owns 300,000 acres.
Why?
Well, as Mr. Turner has been know to say: "It's the only thing that lasts."
Of course, undeveloped land on its own just sits there... It doesn't pay you rent. So what's the secret to owning this land and making huge dividends?
In a word: Trees.
A simple chart will show you why...
This chart tells you what you need to know... Timber has had three down years in the last 47 years. Total returns on timber have beaten the stock market, with less risk. Is that even possible?
Yes. It's not only possible... it's easy to explain. I'll tell you more in a minute.
My longtime readers know that I've been on the hunt for good trees (in the form of timberland) for several years now... In fact, a few years ago, I hired a timberland valuation expert, and we started traveling together. We looked at timberlands from the Pacific Northwest to the southeastern U.S. We even took a private plane across Argentina to swoop in and size up the timberland opportunities and sawmill facilities down there.
In the course of my research, I think I've come across every major timber deal in the U.S. over the last 10 years (maybe 100 major deals). And I've found and recorded most mid-sized timber deals in the southeastern U.S. as well. In short, I know timberland prices.
According to my homework, midsized tracts of timberland with a variety of tree ages might go for $1,500 an acre or more to individual investors, and very large tracts with mixed ages for $1,200 an acre or more right now.
One of the investments I'm going to tell you about in this report is about $1,200 an acre – a bargain for us.
We ought to have to pay a premium to buy a quality timber company. If we bought timber on our own, we'd likely pay $1,500 or more per acre. And we wouldn't be diversified. Plus, we'd have to pay above and beyond the cost of the acreage for many services in order to manage the land. And our return would be hurt by our ignorance of how to efficiently run the thing.
But as I'll show you in this report, it's actually cheaper and easier for you to buy trees on the stock market than it would be for you to buy land and trees on your own.
So let's get right to it...
How Undeveloped Land
Can Pay You Thousands of Dollars a Year
Here are the rough numbers on where timberland returns come from:
1% Land value increase
6% Biologic growth of the trees
3% "Stumpage" price increase (in other words, the price of the actual tree)
3% Inflation
In addition, there's cash flow from regular timber sales, and more income from additional uses of the land (hunting licenses, pine straw, and more). The investment proposition is exceptional, if there's an easy way to do it. And there is – you just buy a timber stock.
In some ways, it seems easier to make solid, safe profits in timber than in buying a big company. Think about it... While it's extremely difficult for a large company to grow its earnings by 6%-8% a year, trees grow 6%-8% a year without even thinking about it.
And while it's extremely difficult for a company to increase the prices of its goods by 6% every year, the price of wood, according to investment legend Jeremy Grantham, has increased by that amount for the last hundred years. (Specifically, he says "stumpage" prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.)
So... the trees grow 6% a year, the price of the wood goes up 6% a year (counting inflation)... and we haven't even talked about the underlying appreciation of the real estate... or the advantages of professional timberland management, which is starting to reap the benefits of genetic engineering.
When you really understand this, you can understand how timberland has actually beaten the stock market since 1960 (as far back as data goes). Stocks did extremely well in that time... up nearly 12% a year. But the total return on timberland was even better, at nearly 14% (according to James W. Sewall Company).
Another nice thing is that timber is completely uncorrelated to the stock market. It makes sense... the trees have never heard of the Nasdaq bubble... and they don't know what a War on Terror is.
The last great bear market in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time literally lost money, due to inflation.
However, as the table below shows, an investor in timber never had a losing year... More often than not, the returns were in the double digits... with a 55% return in 1973 and a 47% return in 1977.Timber Performs Well When
Stocks Perform Poorly
Year
Stocks
U.S. Timber
1966
-10%
13%
1967
24%
11%
1968
11%
18%
1969
-8%
22%
1970
4%
1%
1971
14%
4%
1972
19%
11%
1973
-15%
55%
1974
-26%
21%
1975
37%
1%
1976
24%
16%
1977
-7%
47%
1978
7%
29%
1979
19%
31%
The 1970s weren't a timber fluke. Even in recent decades, timber has been one of the best assets to own. Consider the graph below... it shows a comparison of the annualized returns for timber versus several other investments. As you can see, timber has performed better than stocks, bonds, and commodities. The total compounded gain during this period was about 16%.
Clearly, timber is an opportunity now. So how do we play it?
How to Buy Timber, at a 30% Discount...
The easy way is to get at timber through publicly traded companies. I'd rather buy company stock than trees. I'd even be willing to pay a premium to buy the stock, since I don't have to go through the rigmarole of buying the land, insuring it, maintaining it, etc.
What I found when I first started investigating this idea is that right now there are ways to buy timber through a stock that are cheaper than buying the land with the trees. It's crazy. But it's true.
The first timber company I recommended to my True Wealth subscribers was Rayonier (NYSE: RYN). Rayonier used to be a paper company. Effective January 1, 2004, it converted into a timber REIT (real estate investment trust). Rayonier has committed to selling off 2%-4% of its 2 million-plus acres of timberland each year, in order to provide shareholders with a stable dividend (currently about 5%). In addition, the dividends from a REIT have some potential tax advantages.
Rayonier's timberland is incredibly valuable. When I first found the company, it was a business with approximately $2.7 billion worth of timber.
When I first began investigating Rayonier, it had a liquidation value of just under $3 billion. Amazingly, the stock was valued at only $2 billion. An extraordinary deal... After I recommended Rayonier at about $40 a share, it went through a stock split, and continued paying big dividends. Our overall return was more than 60%.
While Rayonier is still worth buying, it's no longer the cheapest way to own timber in the United States. Let me tell you about the company that is...
The Best Deal on Trees and Timber
in North America Right Now
Right now, it seems fair to say that bare timberland in the southeastern U.S. is in the $600-$700 an acre range. If the site has been prepped and planted, you can add a few hundred bucks. And if you're a couple of years in, and the weeds have been controlled, and the trees are growing as they should, there's another couple hundred bucks.
So, as I explained, midsized tracts might go for $1,500, and very large tracts for $1,200 an acre or more.
So I find it very interesting that the enterprise value of the biggest timber company in the United States, Plum Creek (NYSE: PCL), is just $1,280 an acre. Compare this to Rayonier's enterprise value, which at $1,575 per acre is still cheaper than you could do on your own... but considerably more expensive than Plum Creek.
(By enterprise value per acre, we mean how much you're paying for each acre, after you factor in the company's cash and debts.)
We ought to have to pay a premium to buy a quality timber manager like Plum Creek. After all, the company is the largest and most geographically diverse private landowner in the nation. It owns more than 8 million acres of timberland, in 18 U.S. states.
As I said earlier, if we bought timber on our own, we'd likely pay $1,500 or more per acre, plus whatever it would cost to manage the land – and we wouldn't be diversified.
But instead of paying a premium for professional management, by buying Plum Creek, we're buying a diversified timber portfolio at a nice discount.
So Plum Creek is the best timber buy in North America right now. Not only does it give you the largest number of trees (more than 8 million acres)... it gives you the best price per acre, and pays a 3.6% dividend.
Action to take: Start your timber portfolio with Plum Creek Timber (NYSE: PCL). You'll own timberland in 18 states, and collect nearly a 4% dividend as the trees grow exponentially, year after year.
Good investing,
Steve
S&P recently launched a new 25-stock Timber and Forestry Index. Back-tested to 2003, the returns have been an astonishing 17.2% a year. This includes some tough times, as demand for lumber and building products has shrunk in recent years.
So what's so great about timberland as an investment? The list is ridiculously long...•
It's a sustainable asset that will keep giving returns for infinity.
• It has no correlation to the stock market.
• It has less volatility than the stock market.
• "Stumpage" (all the wood from the tree) prices have beaten inflation by about 3% a year for nearly a century.
• Unlike businesses, trees easily compound their growth at about 6%-8% per year.
• Supply and demand... Fewer trees and more people could lead to higher prices.
• Valuable real estate. Eventually, some timberland acres turn into expensive neighborhoods.
• New demand. For the first time in history, big institutional investors are getting into timberland.
In short, timberland is just about the Holy Grail of the investment world.
If you haven't already taken a position in timber, it's not too late. I believe the next years will give you returns similar to the past 20.
Here's how...
Why Trees are Such a Good Investment
America's wealthiest individuals have been accumulating land for decades.
Ted Turner, for example, now owns 2 million acres. Jeff Bezos (who started Amazon) now owns 300,000 acres.
Why?
Well, as Mr. Turner has been know to say: "It's the only thing that lasts."
Of course, undeveloped land on its own just sits there... It doesn't pay you rent. So what's the secret to owning this land and making huge dividends?
In a word: Trees.
A simple chart will show you why...
This chart tells you what you need to know... Timber has had three down years in the last 47 years. Total returns on timber have beaten the stock market, with less risk. Is that even possible?
Yes. It's not only possible... it's easy to explain. I'll tell you more in a minute.
My longtime readers know that I've been on the hunt for good trees (in the form of timberland) for several years now... In fact, a few years ago, I hired a timberland valuation expert, and we started traveling together. We looked at timberlands from the Pacific Northwest to the southeastern U.S. We even took a private plane across Argentina to swoop in and size up the timberland opportunities and sawmill facilities down there.
In the course of my research, I think I've come across every major timber deal in the U.S. over the last 10 years (maybe 100 major deals). And I've found and recorded most mid-sized timber deals in the southeastern U.S. as well. In short, I know timberland prices.
According to my homework, midsized tracts of timberland with a variety of tree ages might go for $1,500 an acre or more to individual investors, and very large tracts with mixed ages for $1,200 an acre or more right now.
One of the investments I'm going to tell you about in this report is about $1,200 an acre – a bargain for us.
We ought to have to pay a premium to buy a quality timber company. If we bought timber on our own, we'd likely pay $1,500 or more per acre. And we wouldn't be diversified. Plus, we'd have to pay above and beyond the cost of the acreage for many services in order to manage the land. And our return would be hurt by our ignorance of how to efficiently run the thing.
But as I'll show you in this report, it's actually cheaper and easier for you to buy trees on the stock market than it would be for you to buy land and trees on your own.
So let's get right to it...
How Undeveloped Land
Can Pay You Thousands of Dollars a Year
Here are the rough numbers on where timberland returns come from:
1% Land value increase
6% Biologic growth of the trees
3% "Stumpage" price increase (in other words, the price of the actual tree)
3% Inflation
In addition, there's cash flow from regular timber sales, and more income from additional uses of the land (hunting licenses, pine straw, and more). The investment proposition is exceptional, if there's an easy way to do it. And there is – you just buy a timber stock.
In some ways, it seems easier to make solid, safe profits in timber than in buying a big company. Think about it... While it's extremely difficult for a large company to grow its earnings by 6%-8% a year, trees grow 6%-8% a year without even thinking about it.
And while it's extremely difficult for a company to increase the prices of its goods by 6% every year, the price of wood, according to investment legend Jeremy Grantham, has increased by that amount for the last hundred years. (Specifically, he says "stumpage" prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.)
So... the trees grow 6% a year, the price of the wood goes up 6% a year (counting inflation)... and we haven't even talked about the underlying appreciation of the real estate... or the advantages of professional timberland management, which is starting to reap the benefits of genetic engineering.
When you really understand this, you can understand how timberland has actually beaten the stock market since 1960 (as far back as data goes). Stocks did extremely well in that time... up nearly 12% a year. But the total return on timberland was even better, at nearly 14% (according to James W. Sewall Company).
Another nice thing is that timber is completely uncorrelated to the stock market. It makes sense... the trees have never heard of the Nasdaq bubble... and they don't know what a War on Terror is.
The last great bear market in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time literally lost money, due to inflation.
However, as the table below shows, an investor in timber never had a losing year... More often than not, the returns were in the double digits... with a 55% return in 1973 and a 47% return in 1977.Timber Performs Well When
Stocks Perform Poorly
Year
Stocks
U.S. Timber
1966
-10%
13%
1967
24%
11%
1968
11%
18%
1969
-8%
22%
1970
4%
1%
1971
14%
4%
1972
19%
11%
1973
-15%
55%
1974
-26%
21%
1975
37%
1%
1976
24%
16%
1977
-7%
47%
1978
7%
29%
1979
19%
31%
The 1970s weren't a timber fluke. Even in recent decades, timber has been one of the best assets to own. Consider the graph below... it shows a comparison of the annualized returns for timber versus several other investments. As you can see, timber has performed better than stocks, bonds, and commodities. The total compounded gain during this period was about 16%.
Clearly, timber is an opportunity now. So how do we play it?
How to Buy Timber, at a 30% Discount...
The easy way is to get at timber through publicly traded companies. I'd rather buy company stock than trees. I'd even be willing to pay a premium to buy the stock, since I don't have to go through the rigmarole of buying the land, insuring it, maintaining it, etc.
What I found when I first started investigating this idea is that right now there are ways to buy timber through a stock that are cheaper than buying the land with the trees. It's crazy. But it's true.
The first timber company I recommended to my True Wealth subscribers was Rayonier (NYSE: RYN). Rayonier used to be a paper company. Effective January 1, 2004, it converted into a timber REIT (real estate investment trust). Rayonier has committed to selling off 2%-4% of its 2 million-plus acres of timberland each year, in order to provide shareholders with a stable dividend (currently about 5%). In addition, the dividends from a REIT have some potential tax advantages.
Rayonier's timberland is incredibly valuable. When I first found the company, it was a business with approximately $2.7 billion worth of timber.
When I first began investigating Rayonier, it had a liquidation value of just under $3 billion. Amazingly, the stock was valued at only $2 billion. An extraordinary deal... After I recommended Rayonier at about $40 a share, it went through a stock split, and continued paying big dividends. Our overall return was more than 60%.
While Rayonier is still worth buying, it's no longer the cheapest way to own timber in the United States. Let me tell you about the company that is...
The Best Deal on Trees and Timber
in North America Right Now
Right now, it seems fair to say that bare timberland in the southeastern U.S. is in the $600-$700 an acre range. If the site has been prepped and planted, you can add a few hundred bucks. And if you're a couple of years in, and the weeds have been controlled, and the trees are growing as they should, there's another couple hundred bucks.
So, as I explained, midsized tracts might go for $1,500, and very large tracts for $1,200 an acre or more.
So I find it very interesting that the enterprise value of the biggest timber company in the United States, Plum Creek (NYSE: PCL), is just $1,280 an acre. Compare this to Rayonier's enterprise value, which at $1,575 per acre is still cheaper than you could do on your own... but considerably more expensive than Plum Creek.
(By enterprise value per acre, we mean how much you're paying for each acre, after you factor in the company's cash and debts.)
We ought to have to pay a premium to buy a quality timber manager like Plum Creek. After all, the company is the largest and most geographically diverse private landowner in the nation. It owns more than 8 million acres of timberland, in 18 U.S. states.
As I said earlier, if we bought timber on our own, we'd likely pay $1,500 or more per acre, plus whatever it would cost to manage the land – and we wouldn't be diversified.
But instead of paying a premium for professional management, by buying Plum Creek, we're buying a diversified timber portfolio at a nice discount.
So Plum Creek is the best timber buy in North America right now. Not only does it give you the largest number of trees (more than 8 million acres)... it gives you the best price per acre, and pays a 3.6% dividend.
Action to take: Start your timber portfolio with Plum Creek Timber (NYSE: PCL). You'll own timberland in 18 states, and collect nearly a 4% dividend as the trees grow exponentially, year after year.
Good investing,
Steve
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