Dividend-paying stocks, and real estate investment trusts (REITs) in particular, have gained coverage as a fundamental part and strategic asset when building an investment portfolio. Investors value REITs for their regular and reliable income generation, and for their diversification. As James Glassman noted recently in Kiplinger’s,
“…investing in stocks that pay dividends—especially rising dividends—turns out to be a terrific strategy. The S&P 500 Dividend Aristocrats index has returned an annual average of 18.3% over the past 10 years, compared with 17.1% (including dividends) for the S&P 500 as a whole.”
What do we see with respect to cash distributions (dividends) and performance from publicly-traded firms that own timberlands and grow trees?
Financial Performance of Tree-Growing Firms
When reviewing the returns of public timber vehicles, we remind ourselves of the importance of starting price. The primary driver of returns in this math, as with private timberland investments, is the price at acquisition. This holds regardless of the outlook for and volatility of the economy.
Fortunately, timber equities, whether REITs or master limited partnerships (MLPs), also deliver consistent cash distributions. With this in mind, Forisk intern Tyler Reeves sifted through the cash yields of public timber firms over the past three years to help us make a few comparisons and observations.
The table above summarizes cash distribution and share price data since 2016 for the four public timber REITs and the one public timber MLP. On average, for investors buying shares on the first trading day of 2016, these firms generated cash yields exceeding 5% per annum (partly thanks to a special distribution by PotlatchDeltic in 2018; thanks!). All firms exceeded 4%. The three-year total returns, however, remind us of the real volatility at play, as two firms produced negative total returns. Regardless, all firms performed well for the first two quarters of 2019.
Any story about prices or returns getting back to normal, returning to trend, or reverting to the mean presumes that an average return on investment (ROI) exists. It assumes that deviations from the mean are temporary. Our experience is that average, acceptable and expected are in the eye of the beholder and subject to context. Are you a buyer or a seller? Is this asset tactical or strategic? Are you in it for the cash or the appreciation?
Firms pay dividends out of free cash flow, so they also align with a philosophy of conservative corporate management. Executives will avoid unnecessary risks that jeopardize distributions, while also seeking opportunities to increase dividends. When senior executives and Boards raise dividends, they reflect a form of confidence and expectation for growth.
This guest post is courtesy of Brooks Mendell, Ph.D., President and CEO at Forisk Consulting, a Georgia-based firm that specializes in forest-industry, timber-REIT, bioenergy, and timber-market research. For more information, visit www.forisk.com.