Prior to its 2015 merger with the Weyerhaeuser Company, Plum Creek was a private timberland owner in the U.S.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On July 1, 1999, Plum Creek Timber Company, L.P. converted from a master limited partnership to a corporation. Plum Creek Timber Company, Inc., the new Delaware corporation and successor registrant, will elect to be treated for Federal income tax purposes as a real estate investment trust or REIT. As part of the REIT conversion, Plum Creek Timber Company, L.P., ceased to exist... Prior to July 1, 1999, Plum Creek Timber Company, L.P., Plum Creek Manufacturing, L.P., and Plum Creek Marketing, Inc., owned, managed and operated approximately 3.2 million acres of timberland and eleven wood products conversion facilities in the Northwest, Southern and Northeastern United States. Plum Creek Timber Company, L.P. owned 98% of Plum Creek Manufacturing, L.P. and 96% of Plum Creek Marketing, Inc. Plum Creek Management Company, L.P., the general partner, managed all of the businesses and owned the remaining general partner interest of the manufacturing and 4% of marketing. As a part of the reorganization, Plum Creek Management Company, L.P. was merged into the corporation.... The REIT conversion was accounted for as a reorganization of affiliated entities... As a part of the REIT conversion, the partnership's outstanding units were converted on a one-for-one basis into 46,323,300 shares of common stock of the corporation. Additionally, the equity interests of the partnership's general partner were converted into 16,498,709 shares of common stock and 634,566 shares of special voting stock. The special voting stock is convertible into common stock at the option of the holder on a one-for-one basis and is entitled to receive the same dividends as the common stock. The special voting stock is considered outstanding and is used in computing basic and diluted earnings per share.
On October 6, 2001, we merged with The Timber Company, with Plum Creek Timber Company, Inc. remaining as the surviving entity. (See Note 11 of the Notes to Financial Statements.) Under the terms of the merger agreement, The Timber Company shareholders received 1.37 shares of Plum Creek stock for each share of Timber Company stock, or approximately 112.7 million shares. Furthermore, Plum Creek assumed approximately 2.8 million Timber Company stock options in connection with the merger, which were converted to approximately 3.8 million options to acquire Plum Creek common stock.
The company issued 13,915,000 shares of common stock on November 4, 2013. The net proceeds of $607 million from the equity offering were used to pay the cash portion of the acquisition and the acquisition related transaction costs, with the balance used to repay $376 million of outstanding debt obligations.
On September 15, 2015, we announced the formation of a timberland venture, Twin Creeks Timber, LLC ("Twin Creeks Timber"), with several institutional investors (i.e., several state investment funds). In connection with the formation of the venture, we agreed to sell and contribute approximately 260,000 acres of our southern timberland property (approximately 8% of the timberlands currently included in our Southern Resources Segment) in exchange for cash of approximately $420 million and a common ownership interest in Twin Creeks Timber, valued at approximately $140 million. Plum Creek's aggregate capital commitment (including the value of contributed timberlands) to Twin Creeks Timber is approximately $201 million, representing a common ownership interest in Twin Creeks Timber of approximately 21%. The institutional investors have agreed to contribute cash of $752.5 million in exchange for a common ownership interest in Twin Creeks Timber of approximately 79%. Plum Creek may, in its sole discretion and without the consent of the other members, increase its capital commitment to achieve or maintain up to a 25% ownership interest in the venture.
On November 8, 2015, Plum Creek and Weyerhaeuser Company ("Weyerhaeuser") announced each of its Board of Directors approved an Agreement and Plan of Merger (the "Merger Agreement"). Under the Merger Agreement, Weyerhaeuser is the surviving entity and Plum Creek will cease to be a publicly-traded company as of the merger date. On the merger date, each outstanding share of Plum Creek will be exchanged for 1.60 shares of Weyerhaeuser.