A Better Way to Profit From the Real Estate Recovery
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For investors looking to profit from the recovery of the housing market in the United States, businesses that operate in the lumber sector are far more attractive than home builder companies. While home builder shares have surged in 2012, stocks in the lumber industry have also risen. These timber stocks will not only gain when home builders do from better housing data in the United States, but also offer above-average dividend income; and more protection against a downturn due to having a broader base of operations both geographically and in core business function.
Home builder stocks such as Toll Brothers (NYSE: TOL) and PulteGroup (NYSE: PHM) are pretty much "one trick ponies." These companies do well when the housing market in the United States is strong, and perform poorly when it is weak. Needless to say, PulteGroup, Toll Brothers and every other home builder stock was devastated by the impact of The Great Recession on the real estate sector. Both Toll Brothers and PulteGroup, as with many other home builder stocks, have rallied in 2012 due to the housing market in the United States showing signs of recovery. As the chart below shows, however, PulteGroup and Toll Brothers are trading well below their pre-recession highs.
Also rebounding have been shares of real estate investment trusts and companies in the timber industry such as Weyerhaeuser (NYSE: WY), Plum Creek (NYSE: PCL) and Rayonier (NYSE: RYN). Year to date, Weyerhaeuser is up 32.45%, Plum Creek is trading higher by 14.49%, and Rayonier has risen by 10.40%. As with home builder stocks, much of the gains can be attributed to the recovery of the American real estate market.
But, unlike home builders in the United States such as Toll Brothers and PulteGroup, Plum Creek, Rayonier and Weyerhaeuser gain from growth abroad. Much of the output from the timber industry in the United States now goes to foreign housing markets, particularly those in Asia. While economic growth is slowing in China, the real estate sector across the Pacific is still expanding.
The burgeoning consumer class in emerging markets is also resulting in more business for the American timber industry. As a result of greater affluence in the emerging market consumer class, there is a growing demand for personal paper products that increase the need for timber. Even during The Great Recession, the emerging market middle class continued to expand. By the year 2025, according to a recent report by McKinsey & Co., the global research firm, annual spending by the emerging market consumers will be $30 trillion, half the total for the entire world.
In addition to a broader exposure to overall global market demand, these lumber stocks are sound enough to offer dividend income to the shareholders. Neither Toll Brothers nor PulteGroup has the financial means to pay a dividend. While the average dividend yield from a member of the Standard & Poor's 500 Index is around 2%, Plum Creek offers one of 4.2% to its shareholders. The dividend yield for Rayonier is 3.7%. For Weyerhaeuser, the dividend yield is 2.4%.
Not only are the income statement aspects far superior for timber companies, so are many factors relating to the balance sheet. While some are questioning the actual value of raw land that home builders are carrying on books, these assets for timber companies actually perform. A vacant lot is a tremendous liability for a home builder that may never be built upon or sold. For a lumber company, virgin forest is a future revenue stream. The high inventory levels of home builders that have increased over the past decade reveal the unhealthy trend for homebuilders.
TOL Inventories data by YCharts
Companies such as Weyerhaeuser, Plum Creek and Rayonier profit from the US housing market, the overseas real estate sector, and a greater demand for paper products from the expanding consumer class around the world. In addition to the broader flows of revenue from far broader and far greater sources, the dividend income provided is also more substantial than those of American home builder stocks. For investors looking to profit from the recovering real estate market, the timber industry offers a higher total return from a wider base of earnings.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Weyerhaeuser Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
