Plum Creek: Buy timber for a play on housing

Here's a way to invest in a rebound with less risk than homebuilding stocks.

By TheStockAdvisors Aug 17, 2012 11:51AM
© CorbisBy Ian Wyatt, Daily Profit

I want to invest in the housing recovery, but I also want to invest for income and stability.

Plum Creek Timber (PCL) invests in both timber and land. It is the nation's largest holder of timberland. What's more, this company pays a dividend that generates a generous 4.2% annualized yield.

New-home construction is on the rise, and housing starts have been in a perceptible, persistent uptrend for the past year. I don't see that trend reversing anytime soon.

There's simply a dearth of new-home inventory. In June, there were 144,000 new homes for sale -- the lowest on record dating back to 1963.

At the same time, demand is rising, thanks to stabilized home prices and mortgage rates that are at their lowest in 60 years. 

The trend in new-home construction is good news for Plum Creek. Timber demand and timber prices are closely tied to housing construction. An average new home contains more than 14,000 board feet of lumber.

Given the trend in new-home construction, I wasn't surprised to see Plum Creek report that revenue in its Northern and Southern operating regions -- which are closely tied to tree harvesting -- rose 27% and 25%, respectively, in the second-quarter of 2012 compared to 2011. The increase was driven by a 30% increase in saw log harvest.

So obviously Plum Creek's fortunes are tied to the housing recovery, but not all its fortunes. You see, unlike the other large timber companies, Plum Creek has only a small manufacturing operation.

The high focus on timber and timberland makes Plum Creek the purest timber play of the bunch, and that offers additional benefits.  

Although timber is considered a renewable resource, the world's timber supply is steadily shrinking, by an estimated 2.4% annually since the 1990s. Over the long term, this trend will make the remaining land and the timber that grows on it more valuable.

I first added the shares to my high-yield portfolio in January, and have generated a nice 10.7% return over the past seven months. But I think there is more upside.

Plum Creek is a solid price-appreciation investment tied to the housing recovery. But it's also a solid investment for income and for reducing overall portfolio risk through asset diversification. 

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