Plum Creek Timber Co Inc (PCL) is the largest owner of timberland in the US, with 7.4MM acres. It enjoys a portfolio of timber that management harvests while keeping an eye on how much value is being realized for the timber sold. The price of wood pulp and paper products has a high coordination with GDP growth/constriction, so during times of low demand, during a weak housing market or economic constriction or delay of purchase orders, management has stepped in to cut "the 2009 harvest by approximately 500,000 tons in aggregate" of their sawlog harvest as per the Q1 conference call.
The projected harvest of ~5MM tons of pulpwood and ~6MM tons of sawlog will constitute the entirely of PCL's 2009 harvest season, providing the profitability to maintain the healthy dividend constituting an ~80 payout rate against net profits. The deferal of 1MM tons of wood to 2010 or thereafter is a play by the management that better economic times are to be expected during Q3 and Q4 of this if not next year. The maturation of these forest in the meantime, coupled with the 500,000 new seeds planted in the northern Michigan regions of Escanaba, ... and near Marquette this year, will strengthen an already strong balance sheet and yield higher dividends when the GDP starts to move back into the black, compared to the 5.7% constriction in Q1 of 09'.
With 28% quarter-over-quarter price decline in the Pacific Northwest, management is choosing to temper harvesting amidst "mult... lows" according to David Lambert, CFO. The board has made good use of market lulls to use $87MM to repurchase 3.3MM shares, constituing 2% of the outstanding shares at an average price of $26.57 per share, an exercise that has rewarded existing shareholders with a boost in share price to the $34 we find it at today.
A full $50MM is left under board authorization for further buybacks in the future. Compared to many of the overleverage ticking-time-bombs of insolvency we find violently kicking about on the market today, the $355MM cash and a $540MM line of credit provide a $900MM liquidity base ready for the tapping. This positions PCL in an enviable position poised to take further advantage of investment opportunities which may fall into its purview.
The immediate reponse to the ebb in demand is to close mills with the Pablo as the first to go: http://www.missoulian....
Further shut-downs and the reduction in the administrative expenses that go along with them will help PCL weather the historic lows for these wood prices. The mills in Evergreen and Columbia Falls have been closed in the past, and if they are closed, then management, specifically Rick Holiday, pointed to their ease in starting up again (when demand permits) as a likely cash-flow positive venture.
Disclosure: No Positions