What the heck is a Pinchot Plan?

2007-01-20 21:44 | Posted by The Graham Investor | Permanent Link | General

NOTE: To avoid having to reply to everyone individually, I have created a FAQ regarding the Pinchot Plan.

I've been receiving various emails plugging a "retirement plan" called the Pinchot Plan. If you sign up you could collect thousands of dollars in checks every year, or so the article says. Sound intriguing? Read on.

Who is this mysterious Pinchot and what is this plan? Gifford Bryce Pinchot was born in 1865 and was the first chief of the United States Forest Service, as well as twice being Republican Governor of Pennsylvania.

Pinchot's fame comes from being one of the first people, if not the first, to come up with a method of commercial forestry management that was truly sustainable.

I haven't been tempted to subscribe to the newsletter to find out all the details, because it's pretty clear that the "Pinchot Plan" companies are a select group of lumber or forestry REITs (Real Estate Investment Trusts). Just by noting the information in the article, it was easy enough to find out what they are by doing a quick Google:

LFB - Longview Fibre, $20.71 4.50% yield
PCL - Plum Creek Lumber $40.20, 4% yield
PCH - Potlatch $47.59, 4.20% yield
RYN - Rayonnier $41.97, 4.50% yield
POPEZ - Pope Resources $42.50, 2.60% yield

LFB and PCH paid out special dividends of a whopping $7.54 and $15.15 per share respectively in 2006, but it seems that these were a one-off related to their conversion to REITs. (Now if someone could give me a list of all companies that are going to convert to REITs soon, that would be great!)

Apparently according to the article, "if you owned 2000 shares in each of these investments, you would have collected $77,360 in dividends over the past two years". It seems to me that this amount includes the one-off special dividends for the aforementioned conversion to REITs, so that is a "lucky" $45,380. Ongoing dividends for a portfolio of 2000 shares of each of these 5 stocks at current prices will surely be less than 20,000 per year on an investment worth a shade under $400,000.

What about capital growth? Here are approximate prices two years ago:

LFB - $15
PCL - $35.50
PCH - $45.50
RYN - $30
POPEZ - $25

The only two that have had outstanding returns in a two year period are Rayonnier and Pope Resources, but all have done well in the long-term. Sustainable forestry is a fairly safe investment by any standards, and these stocks are certainly pretty good long-term investments. However, I think the article may well have over-hyped the returns a smidgen.

Still, anyone who is into value investing will also want to have a portfolio of high-dividend paying stocks such as these. Why settle for 4% though, especially when it's possible to find stocks paying dividends of 8% or more if one looks hard enough. Closed-end funds are a case in point. One I particularly like is the Zweig Total Return Fund, ZTF, which pays a 9% dividend (around 8% after expenses). Marty Zweig's ZTF fund is almost a "perpetual money machine", churning out returns on a regular basis. Closed-end funds trade like stocks and you can buy and sell them during market hours (unlike Mutual Funds which you can only buy at closing prices).

ZTF has pretty much trended downward in price since 1994, but this is only half the story, since the Net Asset Value has recently started increasing after several years of ZTF trading at a discount to NAV. An optimal strategy for buying Closed-end funds might be to screen for those with a high dividend that are currently trading at a discount to Net Asset Value.

Closed-end funds can be screened at the Closed End Fund Association website.

My preference is to look for CEF's trading at a discount to NAV with high dividend
yields. (Select, say, 1 month Market Return. Also select Discount, and optionally Expense Ratio of 1% or less. The screen won't let you sort by yield/discount so you have to do it manually.

There are actually stocks paying huge dividends. One of the most frequently discussed is Bermudan-based crude oil shipping company Frontline, owned by Norwegian magnate John Fredriksen which is currently paying an annual dividend of $10 per share. The shares are currently trading at $31.84. Jim Cramer of "Mad Money" seems to be pretty negative on FRO, which could be a Good Thing because if FRO drops further as a result, savvy investors might be able to lock in a dividend yield of truly amusing proportions. But watch those earnings. Cramer's negativity on FRO stems from the fact that high earnings in the last year have been largely due to the high price of oil, and as oil falls those earnings will come down, and so will the dividend. I don't disagree with Cramer totally, but even if oil falls to $35/barrel, there will still be demand for it - perhaps even more than at $55/barrel plus, especially in Asia, and someone still has to move all that oil around.

Dividend stocks are great to hold in a retirement account, especially if the dividends are reinvested and you pay attention to capital growth as well, i.e. consider the total return of dividends plus capital gain. A 10% annual dividend is not much good if the underlying asset drops 20% during the holding period.

Authors: Bryan Perry, Tobin Smith

Edition: Hardcover

Publisher: Wiley

ISBN: 0470095520

Amazon Price: $24.95 $14.97 You save $9.98 (40%)
Third Party Price: $14.66 You save $10.29 (41%)

Availability: Usually ships in 24 hours

View details at Amazon

Comments

2007-12-14 13:03 | Posted by Kavakat

Very interesting analysis. My only concern is whether one should take into account where the lumber/ land is, geographically held, and whether, with global warming turning off the faucets around the country/world, the assets are wasting, in both senses. Dead or weakened and diseased trees due to drought have greatly decreased value. Any thoughts??

2007-05-14 22:39 | Posted by The Graham Investor | http://www.grahaminvestor.com

Mack

Thanks for your comment. Regarding the "96 checks", some companies actually pay monthly dividends. ZTR (thanks for the correction) does. Hence 8x12 = 96.

I agree, dividend investing is all the rage these days. Probably rightly so with low taxes on dividends. Of course if you can invest in dividend stocks within a tax deferred account and reinvest the dividends then even better.

Another dividend-investing strategy that could be used as an adjunct to Pinchot type stocks is the "Americas Oil Pension" (A.O.P.) strategy being touted by the same newsletter. This strategy apparently advocates - again, I have not bought the newsletter, rather I did my own searching - investing in stocks like Kinder Morgan Energy Partners (KMP, yielding 5.9%), Teppco Partners (TPP, yielding 6%), Holly Energy Partners (HEP, yielding 5.5%) among others.

2007-05-13 16:44 | Posted by Mack M. Braly

I just discovered your Blog?/Website? while I, too, was curiously poking around about the 'pinchot' retirement plan. I think it is excellent. Congratulations for a really helpful and informative locus.

Apparently high-dividend investing is all the rage among the newsletter writers these days. In the same mail I got the 'Pinchot' pitch, I got another one from Oxford Club touting eight high-dividend stocks that will return (so the pitch says) 96 dividend payments per year. Not sure how 8 stocks with quarterly dividends adds up to 96 checks, but that's what it says.

Dick Young has been advising this strategy (i.e., high and consistent dividend payers for a long time. I'm starting to think it's not a bad screen. Financials can lie, dividends can't, at least not without a pretty glaring red flag going up.

One nit to pick -- the Zweig Total Return Fund symbol is ZTR, not ZTF.

Mack

2007-02-05 16:57 | Posted by Timber_investor

I've been following Pope for a while now, and fortunately took a long position when I rebalanced my portfolio in December based in part on the following information. Part of Graham's mantra is buy undervalued assets, and Pope and many of the timber companies fit this for two reasons. First, their real estate is often worth more than their enterprise value, and second their price to cash flow is very, very cheap.

For purposes of comparison I looked at Pope, Rayonier, Potlach, and Plum Tree. I looked at both cash flow (using EBITDA as a good proxy for cash generated by operations) as well as the underlying value of the real estate owned by each. Ideally we'd all like to buy assets at a discount to their value and/or a stream of future cash flows cheaply, preferably with a wide margin of error.

First I compared the ratio of market cap to EBITDA. This gives you the multiple that you're buying the cash flow for, similar to a p/e but without all the non-cash stuff that can distort earnings:

Rayonier: 9.7
Potlach: 11.22
Plum Tree: 12.17
Pope: 7.1
S: 7.1

I used the current price of $43 for Pope. Note that before this latest run up Pope's ratio was 5.7 at a price of $34. Next I took a look at what you were buying in terms asset value. If you bought today and liquidated the company, what would you get for your money: ie purchase all the equity, pay off the debt, and sell the assets.

The ratio I used is enterprise value (market cap + debt - cash) to an estimate of total real estate value. Caveats: most companies have assets and value over and above their real estate, so this in somewhat conservative. I split the holdings into timber and residential/higher better use, so for Pope that's 114,000 and 3,000 acres respectively. For pricing I used $1,100 per acre for timber and $20,000 for residential. The timber is on the low end of the typical PNW transaction range of $1,100 to $1,200, while I think the residental is conservative given the company's holdings and past transactions but it's really a bit of a SWAG. Here's what you get:

Rayonier: 1.38
Potlach: 1.45
Pope: 1.08
Plum Tree: 48.58

At a per share price of $34 Pope's ratio was 0.94, meaning you could buy $1.00 worth of assets for $0.94. As noted above, this assigns no value to ongoing operations such as consulting, lumber or fibre production capabilities, etc. Clearly that's were a lot of Plum Tree's value is. It's also where Pope's growth is likely to come from.

Finally, I looked at growth potential. Contrary to a couple of prior posts, I like the private equity fund strategy, which is very similar to what Brookfield and Macquarie have done very successfully. Not only does Pope get to coinvest in a fund with enough scale to compete against other TIMO's to purchase attractive smaller timber parcels at a decent price, but they collect all the fees for managing the private equity fund! That's a nice bit of leverage. I also like that fact that they raised their stake from $5 to $10 million and aligned everyone's interest Pope, the fund's advisor, now owns 17% of the fund.

I also like to see management's skin in the game through widespread stock ownership. For example, Brookfield mandates that officers and directors build up share ownership equal to three times their annual compensation within five years of joining the company. The best part is they are expected to buy it by taking part of their salarly in stock. That's aligning interests. Pope's CEO holds 4.1 times his annual compensation in Pope units, and the CFO holds 2.7 times his. Not bad, but wider management interest is always better.

Management has also done a nice job of communicating with shareholders. I especially liked the presentations from the private equity roadshow that lay out their age stratified timber holdings.

Overall, my take is Pope is a nice buy and hold stock for the long-term. For me it passed the "would I be happy buying it and not looking at the investment for the next 5-10 years" test. I believe management will be able to successfully increase their timberlands under management through their private equity fund strategy, and increase both EBITDA, the dividend, and thus the stock price over time. With a conservative estimate of a dollar in assets for each dollar in market cap, I also don't see much downside risk. I do think at $43 the company is fairly valued, versus a nice discount at $34, and still has considerable upside over the long haul.

2007-02-03 10:30 | Posted by Skeeter

May want correct Pinchot's dob to 1865

Trackbacks

Trackbacks are closed for this entry.

The Graham Investor

Sections

Personal tools

gi stock quote

What the heck is a Pinchot Plan?

Comments

Trackbacks