Devoted to understanding the basics and fundamentals of investing

Another interesting topic came up on my trip to NY last week.  What should a company do when it can't earn its cost of capital in a business?  International Paper (IP) and Weyerhaeuser (WY) are paper and forest products companies.  They are having a difficult time earning their cost of capital on some of their lines of business including their timberlands holdings.

IP has decided to monetize the timberlands (sell them off) and invest the proceeds in their remaining lines of business and return some to investors.  When IP finishes its asset sales, it will be a much more focused company operating in just a couple of business lines.  Their philosophy might be stated as, "Do a few things and do them very well." 

Weyerhaeuser on the other hand has decided to keep their timberlands.  WY plans to invest in the businesses that aren't earning their cost of capital to improve efficiency and returns.  Their business philosophy might be stated as, "Don't put all your eggs in one basket."  Weyerhaeuser believes that having a diversified portfolio of businesses will help them weather periodic cyclical storms.  They can raise cash in an emergency by selling off some of their hard assets like the timberlands.


Who is right?  There are positives and negatives to both positions.  The stock market has treated them both well.  I think most of the bond world prefers the WY position because we tend to be a conservative lot and like having margins of error if we are wrong.  I guess time will tell.

Now go out there and make some money.