There is one commodity that is currently worth its weight in gold. And it may be worth more than its weight in gold at this point. We are not discussing Bitcoin, diamonds, or any other form of "valuable" stuff, and we're talking about lumber.
Lumber has become a hot commodity in recent months, with futures on the Chicago Mercantile Exchange reaching an all-time high of more than $1,700 per thousand board feet in mid-May. While lumber prices have declined slightly, they remain higher and near levels not seen in decades, benefiting lumber stocks.
The spike in pricing and, by extension, lumber stockpiles is being fueled by a mix of pandemic-related shortages and rising demand. As is the case with most industries, wood firms have faced significant labor shortages and restrictions due to the COVID-19 virus. Indeed, by April of last year - smack dab in the middle of the pandemic approximately 40% of North America's sawmill capacity had been shut down.
The issue is that the demand for lumber has risen dramatically throughout that period. The housing market has made a strong comeback due to cheap borrowing rates and inflation fears. According to the latest figures from the United States Census Bureau, the number of new homes sold in April increased by 48.3 percent year over year. Additionally, building permit data has trended upward.
This has resulted in a highly favorable environment for lumber stocks. Perhaps the most encouraging aspect is that many analysts now believe that elevated timber prices will remain indefinitely. Sawmill utilization remains low, demand remains high, and lumber producers have no immediate plans to increase supply.
Lumber is a ubiquitous commodity used for a wide variety of purposes, most notably construction. Buildings, residential homes, outdoor structures, and virtually any other type of permanent structure require a significant amount of lumber, contributing to sustained demand over time.
As a result, lumber is mainly dependent on the building industry, which heavily depends on economic conditions. When the economy is healthy, new construction investment is typically high, which increases demand for lumber, which can cause prices to skyrocket.
Additionally, wood products are utilized in the manufacture of paper, the production of pellets for energy, and various other applications. These are typically less cyclical than construction. Indeed, the companies on our list are more heavily leveraged to these less cyclical uses of lumber, enabling them to earn the cash necessary to pay and increase dividends.
The economy's strength, which fuels construction activity, affects lumber demand. However, lumber is also subject to supply constraints due to the scarcity of specific types of wood, environmental circumstances such as fungi or diseases that might affect crop availability, and inflation.
As is the case with every commodity, commodity prices tend to follow suit when inflation expectations rise. This can result in significant changes in lumber prices, affecting profitability for businesses that rely on lumber for revenue and earnings in one way or another.
Even with these factors in mind, we believe that lumber may be an excellent source of profits and growth given the proper selection of components to invest in. The following are ten lumber stocks to consider for dividends:
1. Resolute Forest Products Inc. (NYSE: RFP)
Resolute Forest Products Inc. is a pulp and paper manufacturer in Canada created in 2007. Over the last year, the stock has generated more than 505% gains for investors. The company manufactures and distributes lumber products in various nations, including Canada, Mexico, and the United States. The corporation markets multiple products, including paper, tissue, wood products, and market pulp.
Resolute Forest Products Inc. is an excellent income stock for investors. On June 10, the firm declared a special dividend of $1 per share, paid in early July to shareholders. Additionally, the corporation announced $50 million in additional projects using wood goods.
Resolute Forest Products Inc. reported quarterly earnings per share of $1.06 in late April, missing market forecasts by $0.61. Revenues totaled $873 million during the period, increasing more than 26% year over year.
At the end of the first season of 2021, 16 hedge funds in Insider Monkey's database held holdings in Resolute Forest Products Inc., totaling $367 million, up from 15 in the preceding quarter totaling $247 million.
2. PotlatchDeltic (PCH)
PotlatchDeltic has always been the underdog when it comes to large timber REITs. That began to change a few years ago when it joined with Deltic Timber to establish the company it is today, and it is now a lumbering powerhouse.
While PCH is smaller than Weyerhaeuser — with approximately 1.8 million acres – it is no slouch. PotlatchDeltic, like WY, sells timber and wood products. The distinction is that the smaller PCH is more concerned with market value for its land than with long-term rental arrangements. This can result in some significant swings in its earnings. However, it has recently succeeded in supercharging them.
PotlatchDeltic's first-quarter earnings from its wood products sector increased by 79 percent sequentially, while timberland earnings increased by more than 9 percent. The absurdity is that lumber prices have barely increased above the average $890 price Potlatch observed in the first three months of 2021.
As a result, PCH management appears fairly convinced of continued earnings growth. Analysts concur. Raymond James analysts Horne and Workman recently increased their full-year profit projections for PotlatchDeltic by 7%, citing PCH's "already poised for another record EBITDA performance in 2Q21."
Increased earnings should also help with shareholder rewards. As a REIT, PCH is required to reinvest the majority of its earnings/cash flows. Horne and Workman anticipate that with increased average lumber prices, Potlatch will have the money flow to expand its payment this year. The lumber stock currently pays a dividend yield of 2.7 percent.
3. Weyerhaeuser (NYSE: WY)
Weyerhaeuser is one of the world's largest forest products firms. It owns almost 11 million acres of forestland in the United States. Additionally, it controls millions of acres in Canada under long-term rights.
Weyerhaeuser joined with Plum Creek in 2016 to achieve this magnitude. The company has grown through organic growth and acquisitions. And this has aided in the establishment of economies of scale.
Geographically, the forest is similarly dispersed, and diversification assists in mitigating losses due to localized forest destruction. Additionally, Weyerhaeuser has a substantial bank sheet and cash flows.
The corporation holds over $2 billion in cash and cash equivalents, which readily enables it to meet its debt obligations. Additionally, its revenue is expected to reach $10.2 billion in 2021. This is a 35% increase over the previous year's $7.53 billion. With the rise in lumber prices, this makes sense.
As previously stated, both companies on our list of lumber stocks pay dividends. Weyerhaeuser reduced its premium a few years ago, but it still yields close to 2% today. There was considerable economic insecurity. However, the company is growing well and will almost certainly increase the dividend in the following years.
4. West Fraser Timber Co. Ltd. (NYSE: WFG)
West Fraser Timber Co. Ltd. is a forestry firm situated in Canada created in 1955. Over the last year, the stock has returned more than 121 percent to investors. The company offers various wood-related products, including lumber, paneling, pulp, and paper. It is primarily active in Canada and the United States, and it does export to South America, Europe, and Asia.
On May 6, West Fraser Timber Co. Ltd. reported earnings for the first three months of 2021, reporting earnings per share of $6.96, $0.51 over market expectations. Revenue for the first quarter of 2021 exceeded $2.3 billion, increasing 162 percent year over year.
The stock of West Fraser Timber Co. Ltd. has been battered in recent weeks by a record low in lumber prices, bringing an end to the industry's bull run that began in the middle of last year. However, industry analysts anticipate that prices will soon recover due to strong demand for new homes.
By the end of the first season of 2021, 25 hedge funds in Insider Monkey's database held holdings in West Fraser Timber Co. Ltd worth $580 million.
5. Boise Cascade
During the epidemic, Boise Cascade was one of the best-performing lumber equities, with a 30% increase in price last year. In 2020, the company's revenue climbed by 18%, and earnings per share more than doubled.
The maker of wood products and building supplies has profited from the housing market boom linked to individuals spending more time at home due to the pandemic. Home prices continue to grow, and demand for single-family houses remains high, which benefits Boise Cascade. With a higher percentage of staff working remotely, the company is well-positioned to capitalize on continuing demand for single-family dwellings.
Additionally, Boise Cascade provides a small but consistent dividend. Because most of the company's revenue originates from building materials, its prospects are inextricably linked to the housing industry, making it an attractive investment if you're optimistic about housing.
6. International Paper
While demand for paper has dwindled in the digital age, International Paper has continued to generate solid returns for investors. IP is one of the world's largest papermakers but specializes in industrial packaging such as cardboard, enabling the company to capitalize on the e-commerce boom. Industrial packaging currently accounts for most of IP's revenue, and the company is pursuing a straight play in that segment following the September separation of its printing paper business, Sylvamo (NYSE: SLVM). International Paper's sole other business division is global cellulose fibers, which comprises the provision of paper products such as fluff and pulp for various applications.
Although IP's revenue and earnings decreased in 2020 due to supply chain issues created by the pandemic, the company is on course to make a good recovery this year. IP has historically paid dividends to shareholders (now yielding 3.8 percent) and trades at a low price-to-earnings ratio, making it an attractive option for value and income investors.
7. Lumber Liquidators
Lumber Liquidators provide an additional way to invest in the lumber sector by exposing investors to the market for finished wood goods such as flooring. Unlike the majority of the stocks on our list, Lumber Liquidators benefits from low commodity costs, making it an attractive investment if you're betting on strong demand for wood flooring but cheap lumber pricing.
The company operates 416 locations throughout the country. It has been profitable in previous years, while management has indicated that sales growth may decelerate in the second half of the year due to supply chain problems and the spread of the delta variation.
Nonetheless, Lumber Liquidators is in a great financial position, having just paid off its outstanding debt of $101 million. Additionally, it is the only pure-play hardwood flooring company, providing investors with a unique exposure to both the housing market and home renovations, which remain robust.
8. Rayonier (NYSE: RYN)
While Rayonier is not as large as Weyerhaeuser, it is nevertheless a well-diversified company. In the United States, this corporation owns or leases more than 2 million acres of timberland. Additionally, it maintains over 400,000 acres in New Zealand.
Rayonier has also expanded organically and through acquisitions. Since 2014, the corporation has acquired timberland valued at more than $800 million, which has contributed to the company's growth in terms of sales and earnings over the years.
In 2021, revenue will reach $1.11 billion, and this is a 29% increase over the previous year's $0.86 billion. This has improved Rayonier's financial condition, as cash and cash equivalents have increased to $0.43 billion. This enables the business to meet its debt repayment obligations quickly.
Increased lumber prices result in increased revenue, strengthening the company's ability to grow and reward shareholders.
Rayonier has already paid a dividend for some years and has maintained it at $1.08 per share for the last few years. And there is a fair likelihood that we will witness an increase in the coming years as lumber costs continue to rise. As a result, you may wish to add this lumber stock to your income portfolio.
9. Amcor plc (AMCR)
Amcor is our top-ranked lumber stock for its anticipated returns and its stellar dividend history. Amcor's dividend has been increased for over 25 consecutive years, earning it a place on the Dividend Aristocrats list. Amcor is one of the 66 Dividend Aristocrats.
Amcor is a leading designer and manufacturer of packaging for food, pharmaceutical, medical, and other consumer items worldwide. The company's headquarters are in the United Kingdom.
On November 2, 2021, the corporation announced its fiscal 2022 first-quarter results. For the quarter, sales increased 10%, with most of the gain coming from price hikes. Additionally, net income increased 10% year over year in the first quarter of the preceding fiscal year.
Additionally, management offered guidance for the remainder of fiscal 2022, forecasting earnings-per-share growth of between 7% and 11% for the entire year. Further, management anticipates an adjusted free cash flow of between $1.1 and $1.2 billion before dividends.
10. UFP Industries
For investors seeking to profit from rising lumber prices, it makes sense to concentrate their efforts on a pure producer of boards, 2x4s, framing, and other authentic wood goods. While both Wyoming and PCH profit from land recreation and related companies. UFP Industries (UFPI, $79.92) is a pure timber producer.
And as a group, UFPI has been on a tear during the commodity's recent run. The lumber company's stock is up a whopping 69 percent yearly. However, the surge to its current share price appears warranted.
UFP Industries reported net sales of $1.83 billion and earnings of $103 million in the first quarter, owing to increased lumber prices. Those keeping track equate to gains of 77% and 157% year over year, respectively, and set new records on both fronts. Low stumpage costs have been a significant factor in UFPI's growth.
Lumberjacks pay stumpage fees to timberland owners in exchange for the right to harvest their land. Stumpage fees are currently at their lowest level since 2011, and timberland owners are almost asking to have their land harvested due to labor storage and pandemic-induced storage.
When crack spreads in the oil industry, reduced stumpage fees help wood producers increase their profits by converting raw wood into finished boards. And with finished lumber prices at all-time highs, firms such as UFPI may profit from the enormous spread.
By the end of the year, stumpage fees are likely to climb somewhat and margins to contract, but analysts remain bullish on the lumber stock's position and capacity to profit handsomely this year and next.
Stanley Elliott of Stifel recently increased UFPI's profit projections due to the sustained strength of lumber pricing and margins.
Bottom Line
Lumber prices increased significantly in 2021. The continuation of the recent increase in lumber prices is contingent on a number of factors, including interest rates, housing activity, and the overall health of the US economy.
As a result, lumber stocks may do well in the future if good industry trends persist. As a result, investors seeking exposure to the lumber industry may find these lumber stocks appealing.
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