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Dr. Paul Price
Articles  | Author's Website |

Always Question the Assumptions

January 10, 2015 | About:

Read Beyond the Headline

Put Every Recommendation through a Reality Check

Financial journalists have hard jobs. They need to come up with new and, hopefully, interesting topics every day, week or month depending on their deadlines. It is considered a coup if you can attract a CEO to speak with. Thus it’s a faux pax if you don’t have nice things to say about their company.

Perhaps that is why this week’s Barron’s was so positive on the shares of REIT (real estate investment trust) Plum Creek Timber (NYSE:PCL). Judging by the headline below, and its teaser, you might think PCL had been a big winner in recent years.

Plum Creek Timber enjoyed good success from its 1989 IPO through 2007. Since then, however, profitability has stalled and cash distributions have barely budged. 2005's EPS established an all-time high of $1.76. Barron’s projects $1.28 in per share earnings in 2015.

PCL’s quarterly distributions totaled $1.68 in 2008, even with an ultra-high payout ratio of 123%. Plum Creek paid just 8-cents more, or $1.76 per share, during 2014. That is a meager 4.76% cumulative increase over six full years. The payout ratio continues to handily exceed reported earnings, leaving little room for future boosts.

As of Jan. 9, 2015, continuous shareholders dating back to 2007’s peak are down almost $4 per share. Buy-and-hold types had another crack at taking profits when PCL momentarily hit $60 during 2008. Those who hung in there for the yield have given back a cool 27.6% from that top, excluding dividends.

PCL underperformed the broad market over the most recent 1-year,3-year and 5-year periods. Despite that, Plum Creek has been quite tradable, based on fluctations in valuation.

This REIT trades more like a 'bond substitute' than a normal stock. Its yield averaged 4.31% over the most recent seven years. PCL’s average P/E over that full span was 31.5x.

Investing well is easier than it might seem.

Traders who bought at discounts to those normalized levels (read: at higher yields and relatively lower multiples, marked with green stars on the chart) did very well. People who paid greater than normal P/Es while accepting less than typical dividend yields (red stars) did badly.

Ignore Barron’s advice.

At the $43.67 quote in their write-up PCL was selling for 36.4x last year’s estimate and about 34x forward projections. The current yield of 4.03% might look good compared to bank deposits but it is somewhat skimpy as judged by Plum Creek's own historical standards.

A regression to normal would only support a 12-month target of about $41. That is equivalent to giving up about 1.5 years’ worth of dividends.

Independent research outfits Standard & Poors and Morningstar both assign [rarely seen] SELL ratings to Plum Creek Timber. S&P sees a one year goal of just $38, about 13% below Barron’s recommended price.

Morningstar is even more pessimistic. They peg fair value at only $31. I believe that is way too conservative in our, likely to persist, ZIRP environment. PCL hasn’t changed hands as low as $31 since the dark days of 2009.

No matter which way you lean, it seems difficult to make a case for buying PCL now.

It’s okay to get investment ideas from all sources. Just be sure you can logically justify any projected results. If the touted stock can't pass the 'smell test' simply pass it up and look for a better bargain.

Disclosure: No position in PCL

About the author:

Dr. Paul Price


Visit Dr. Paul Price's Website

Rating: 5.0/5 (7 votes)



Thomas Macpherson
Thomas Macpherson premium member - 5 years ago

Excellent article Paul. Factual and evidence based investing is the smartest investing. Best - Tom

Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM

A side note about REITs.

Dividends are typically generous as REITs must pay at least 90% of annual income to shareholders each year (they can pay more if they choose to).

Cash distributions from REITs do not count as 'qualified' for income tax purposes. That's because the REITs themselves avoid most corporate level taxation. Income from these are taxed at ordinary federal income tax rates. That makes REIT distributions slightly less valuable than regular dividiends if the shares are held in taxable accounts.

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