A pencil is a weapon and a morale item.
The pencil is a one-time use weapon, as soon as you attack with it, it breaks, its gone, but you have a 100% chance of killing your target in 1 hit. It is best to use it as an emergency weapon and to only use one when you don't have one.
Using a pencil to craft a doodle or a journal is a much better use for it. It will get rid of quite a bit of boredom, without having to bother stacking up on magazines and newspapers.