In a previous post, I wrote that “cash dividends offer a window into what management sees and thinks.” If we treat dividends as a form of communication, then it follows that executives will avoid unnecessary risks that may jeopardize distributions. When Boards of Directors approve the raisings of dividends, they reflect a form of confidence and expectation for growth. That said, how does dividend policy translate in rates-of-return and yields?
The Math of Yields
When reviewing the returns of public timberland-owning companies, we remind ourselves of the importance of starting price. The primary driver of returns in this math, as with private timberland investments, is the price at acquisition. This holds regardless of our outlook for the economy or the implications from volatility in markets or trade policy.
Fortunately, timber equities, whether REITs or MLPs, also deliver consistent cash distributions. With this in mind, Forisk intern Tyler Reeves sifted through the cash yields of public timber firms over the past three years to help us make a few comparisons and observations.
The table summarizes cash and share price returns since 2016 for the four public timber REITs and the one public timber MLP. On average, for investors buying shares on the first trading day of 2016, these firms generated cash yields exceeding 5% per annum (partly due to a special 2018 distribution by PotlatchDeltic; thanks!) All firms exceeded 4%. And while the three-year total returns remind us of the volatility associated with stocks, all firms had solid numbers through the first two quarters (2019 H1 Return).
Any story about prices or returns getting back to normal, returning to trend, or reverting to the mean presumes that an average return on investment exists. It assumes that deviations from the mean are temporary. Our experience is that average, acceptable and expected are in the eye of the beholder and subject to context. Are you a buyer or a seller? Is this asset tactical or strategic? Are you in it for the cash or the appreciation?
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