The Deal That Makes The World’s Safest Investment Even Better

You often hear about recession-resistant investments, especially in the years since 2008… when the financial world was burning to the ground.

#-ad_banner-#But if you had to guess which industry performs the best in all bear markets — one that delivered 9.5% returns in 2008 (when the S&P 500 lost a third of its value) and more than tripled in value during the Great Depression (when other stocks lost more than two-thirds of their value) — what would your guess be?

Unless you read the same studies and research as me, I’m guessing you wouldn’t answer trees.

That’s right… and it makes sense too. A tree doesn’t know anything about too-big-to-fail banks, tech bubbles or savings and loan scandals. They keep growing, constantly getting bigger… offering more resources to harvest.

Timberland is not just a good bet for bear markets, however. Over the last 18 quarters — four and a half years — the NCREIF Timberland Index has only had one negative quarter of performance. And that one barely counts, since the index fell just 0.35%.

So even though trees aren’t necessarily a sexy investment, it’s one you should pay attention to… or at the very least keep a portion of your portfolio invested in.

That’s not to say you need to go out and scout acre after acre of tree farms. There are a few publicly-traded timber companies to choose from. And after a deal that was struck earlier this week, there’s one that stands out as a perfect long-term investment.

Plum Creek Timber Co. (NYSE: PCL) and Weyerhaeuser Co. (NYSE: WY) — two of the largest U.S.-based timberland and cellulose fiber companies — have agreed to merge into one huge business. 

This combined company will own more than 13 million acres of land and be worth roughly $23 billion — an enormous sum for a timberland company.

It is going to be incredibly diverse too. The companies do have some competing operations. But for the most part, they each will bring some specialized types of harvests into the fold. 

The timing couldn’t be any better either. With the slowdown in China, timber has not been an investor favorite of late. The industry had gotten a huge pick up over the years as China began to import more and more timber from Western Canada and the U.S. Northwest.

But that doesn’t mean the industry relies on China or any single geographic or economic area to be a high value investment in its own right. That’s what makes this industry, and this deal in particular, so intriguing.

You see, timber prices — as all commodities do — fluctuate somewhat cyclically. Meaning prices rise and fall and rise again over huge, several-year periods. So there are times when it makes sense to cut down more trees than other times. 

Of course, that means when prices are low for lumber, plywood and cellulose fibers (which are used in various chemicals) timberland companies can just let their trees grow even larger. That gives them even more to harvest in times of high prices.

The trick to really make this wait-for-the-best-prices strategy work, however, is to make sure you have enough various products and types of timberland to still cash in on off-years. The larger a timberland company is, the better it can perform year in and year out. 

That’s why this deal is so big. 

But, like any deal, there will be some winners and some losers. Or at least, one group will do better than the other.

In this case, it’s actually tough to pick the real winner. 

How to Play This Deal

When the deal was first announced, Plum Creek shareholders got the biggest boost in share value.

You see, this deal is actually an acquisition of Plum Creek by Weyerhaeuser. Plum shareholders will control 35% of the new company, while Weyerhaeuser investors will control the other 65%. It will continue trading under Weyerhaeuser’s current stock listing.

But since shares of PCL quickly popped to near the buyout price when this news hit the market, the smart move now would be to get in on Weyerhaeuser’s side. In fact, that’s how you can best take advantage of all the other benefits that come with this combination.

Along with the news of the acquisition, Weyerhaeuser announced that the new company will immediately institute a $2.5 billion share repurchase program. It will also keep Weyerhaeuser’s current annual dividend of $1.24 per share.

At today’s prices, that means you’d collect a 4.2% dividend if you bought shares immediately.

While the earlier you get in on this mega-timberland play the better, the industry isn’t exactly known for moving very quickly. They do primarily just grow trees after all.

So I think you should have some time to get into this position. Unless, of course, the rest of the stock market does hit a snag. Then, you’ll wish you had gotten into the safety of timberland when you had the chance.

Risks To Consider: Investing based on not-yet-closed acquisition news is never a sure bet. While not likely in the least, all acquisitions are subjected to regulators’ and government agencies’ prying eyes. The deal could — again, not likely at all — fall apart. So always consider that when investing during a big buyout like this one.

Action To Take: To add both stability and safety to your portfolio — not to mention income, growth and value — consider picking up a few shares of Weyerhaeuser Co. (NYSE: WY). As soon as this deal with Plum Creek is finalized, it will begin producing accretive income for the new company… which is to be immediately used to buy back stock and pay shareholders a dividend. The sooner you act, the better.

Editor’s Note: Millions of people use this company’s products every day — that’s just one reason this income stalwart has already paid more than 542 consecutive monthly dividends. Is it in your portfolio? Learn the name of this high-yielder in the High-Yield Hall of Fame special report.