But there’s much more to the deal than just owning millions and millions of acres of timberland.
WY stock is already one of the better long-term investments out there, and its purchase of PCL highlights timber’s appeal as portfolio holding. It also underscores why Weyerhaeuser is one of the best ways to play the fragmented and uncorrelated sector.
For long-term investors, the story behind WY stock is only beginning, and the deal only serves to strengthen that story.
A Lot to Like From WY-PCL
Truth be told, I’m a little biased in my enthusiasm for the Weyerhaeuser/Plum Creek deal. I own both WY and PCL shares, as well as much smaller rivals Potlatch (PCH) and Rayonier (RYN). But my enthusiasm for the timber REITs isn’t necessarily misguided. Over long stretches of time, timber has been one heck of an asset class.
According to indices publisher MSCI, lumber sales account for some pretty clockwork-like returns — averaging about 2% to 4% a year. Those steady, almost bond-like returns are the stuff that cash flows and dividends are made of.
Add in the fact that prices for timberland — according to the benchmark National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index — have risen annually by nearly 13% a year since 1987, and you start to develop a pretty bullish outlook for timber as a portfolio position.
The beauty for the timber REITs is that they turn those returns and cash flows back into investor-friendly and easy-to-digest dividends.
And at the end of the day, that’s what the Weyerhaeuser deal for Plum Creek is all about.
Combined, the two will own a whopping 13.2 million acres of timberland. To give you an idea on how big that land holding will be, it’s equal to half the size of the state of Tennessee. And unlike many commodities, timber keeps getting larger when it’s not harvested. That means each log is worth more the next year.
Housing is finally coming back, too as September saw U.S. home construction move upwards to be on a pace to build 740,000 new homes. That’s about 70% or so higher than the depths of the credit crisis, which means that WY will be able to tap those fatter logs at the combined entity and earn a better return on them.
Another benefit could be the potential synergies of newly minted mega-timber REIT. WY estimates those synergies to amount to $100 million annually, while DealBook predicts they could eventually fetch around $800 million per year.
Adding in the duo’s newly beefed-up balance sheet — thanks to Plum’s historically conservative management — and you have a recipe for higher dividends and share buybacks over time. Weyerhaeuser estimates that synergies and cash flows from Plum Creek would boost cash flows and dividends within the first year of combining.
Time to Buy WY Stock
Under the terms of the deal, WY is paying about a 14% premium for Plum Creek. Investors didn’t like that amount, and shares of Weyerhaeuser dropped by 3%. That drop, if it holds, could be a prime buying opportunity for investors looking to get in on the timber REIT.
The buyout premium is actually less than the average 20% boost recorded for M&A deals. So Weyerhaeuser may actually be getting a bargain. And there’s little chance the deal won’t go through.
For starters, PCL shareholders are getting a big jump in their dividends — around 13% — as WY has pledged to keep its payout the same. This is before any increases due to rising cash flows and synergies. That should make Plum Creek’s current owners happy, as will the proposed $2.5 billion immediate buyback that WY is planning when the deal closes. As a PCL stock owner, you’ll get a nice total package return by approving the deal.
Secondly, there are very few suitors that could come in and offer more for Plum Creek. And those that could — institutional money managers like TIAA-CREF or Manulife who have big timberland operations — would find it easier to buy raw land rather than try to integrate a REIT into their system. So the deal will more than likely go through.
With that in mind, the long-term benefits for WY shareholders are great, and the drop in shares makes them even better. Buying today, gives you a 4.14% dividend yield — one that will almost be guaranteed to grow just like the mega-acreage that Weyerhaeuser now owns through the deal.
The Bottom Line: Weyerhaeuser’s deal for rival Plum Creek will create a monster timber REIT, one that will keep the dividends rolling for the years to come. Investors looking for a bargain in the space should snag-up WY stock shares.
As of this writing, Aaron Levitt was long PCH, PCL, RYN and WY.
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