Diapers To Death Income Investing: Making Money From Diaper Fills To Diploma Mills, Old Age Homes And Funeral Parlors

Includes: CCG, LTC, RYN, STON
by: The Wall Street Transcript

A high yielding portfolio can be constructed for investors using a simple cradle to grave economic analysis. Basing our strategy on fulfilling the real estate needs for each of "the Ages of Man", the equal weight portfolio below has a current income yield of almost 7% with some significant potential capital gains upside.

Company Ticker /PE Yield EV
Rayonier RYN 21 %3.7 $ 6.58Bln.
LTC Properties LTC 22 %5.5 $ 1.34Bln.
StoneMor Partners STON /NA %10.1 $ 664Mln.
Campus Crest Communities CCG +100 %6.0 $ 558Mln.
Click to enlarge

This current income strategy completely diversifies the investor from "birth to earth". Starting with companies that provide the raw material for diapers is the first step, no pun intended.

The Wall Street Journal reports in its August 13, 2012 edition that paper "fluff" has become the high margin mainstay of paper mills in the United States. As the Journal puts it, this growing demand benefits American producers because:

"...Asia's growing desire for fluff ... can be made only from the long, coarse fibers of loblolly pine, a fast-growing tree that thrives in the U.S. South. Its fibers are ground, boiled, bleached and pressed into puffy white material that can absorb what a baby can excrete."

A major beneficiary of this economic trend is Rayonier which is organized as a Real Estate Investment Trust or REIT and is currently yielding over 3.8%.

Rayonier has a significant exposure to the diaper business through its "Performance Fibers" division. In a 2008 interview with the Wall Street Transcript the Senior VP of Finance of Rayonier emphasized the value of this product line:

"Particularly during these challenging times, having the historically high profitability from Performance Fibers allows us to be excellent stewards of all of our assets. "

Moving from paper mills to diploma mills, the expansion of student loans subsidized by the US government has generated record college attendance. Campus Crest Communities , a well regarded publicly traded REIT that is currently yielding 6%, has been set up to specialize in providing housing specifically for students: In an August 22, 2011 interview Ted W. Rollins, the Co-Chairman of the board of directors and the Chief Executive Officer of Campus Crest Communities had this to say about the growing demand for his companies properties:

"There are more kids going to college. They're staying longer. And although the Baby Boom's children, the Echo Boom, growth is dipping slightly over the next few years, this attendance is still at record levels. In addition to that, if you look at total enrollment, growth is continuing because the graduation rate at high schools is up. And of these graduates, a higher percentage are electing to attend college full time. In addition, foreign enrollment is on the rise. So those components are pretty compelling."

Moving on to housing for senior citizens and elder care facilities reveals another high yielding REIT: LTC Properties . James Milam, the equity analyst in the space for Sandler O'Neill + Partners, L.P. gushed over this stock in an August 6, 2012 interview:

My top pick [is] LTC Properties, which we have liked for a while. It's a smaller company that's trading at a little bit of a discount to the group, which we think is partly related to size. But they're very disciplined in terms of how they execute their growth strategy.

They have a phenomenal balance sheet with very little leverage. They're essentially acquiring skilled nursing facilities, and also doing some standalone memory care development, which they can fund with low-cost debt, probably around 5%, and investment yields are around 9% or 10% for them. So that's a story we continue to like.

Finally, Stonemor Partners L.P. provides a way for investors to receive well over 10% in current yield from an unavoidable concluding event in everyone's life: death. The stock is up 40% since this 2009 roundtable panel discussion and no wonder since "…the average funeral home in the United States charges about $6,200 for a casketed service."

According to the interview, Stonemor makes its profits from a more stable part of the business: the ownership and long term management of the cemetery. "StoneMor is far more weighted to the cemetery side than it is the funeral side. The cemetery tends to be a much more stable business environment than does the funeral environment. "

In the last quarter earnings call transcript found on Seeking Alpha's transcripts site, the Stonemor CEO suggests that a recent downturn in the stock is an opportunity for investors:

"…if we did start growing the company what you would see is we would start to realize those revenues and earnings that are buried in the no pun intended in the deferred revenue and we will not be charging in the cost associated with those revenues because we had previously charged them in when we made the initial acquisitions."

As has been demonstrated, the legendary riddle of the Sphinx has a corollary in the income investing world. It only remains for the astute investor to answer the riddle by developing their income portfolio with these facts in hand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.