Soaring lumber prices give Weyerhaeuser a big boost

If you’ve visited one of the big box stores to work on a home improvement project, you’ve probably noticed that wood is much more expensive than it used to be. The lumber price chart in 2021 looked more like the chart of a tech stock, as COVID-19 bottlenecks coupled with increased demand created shortages.

The increase in timber prices has directly benefited the largest owner of forest land in North America, Weyerhaeuser (NYSE: WY). As a result, investors could find themselves receiving a nice dividend early next year.

Image source: Getty Images.

Weyerhaeuser is in great demand for the housing economy

Weyerhaeuser is a real estate investment trust (REIT) that owns, controls or manages nearly 25 million acres of forests in North America. The company is also a manufacturer of wood products primarily used for residential construction. This means that his fortunes will generally go up and down with the housing economy.

Over the past year lumber as a commodity has been on a wild ride, with wholesale prices rising 150% in May before finally returning to more realistic levels in July. Just as oil companies profit from high oil prices, Weyerhaeuser’s profits have been boosted by high lumber prices. In the second quarter, sales increased 93% from a year ago, and earnings before interest, taxes, depreciation and amortization (EBITDA) quadrupled. While revenues have increased with lumber prices, the company’s costs have increased at a much slower rate, meaning that price increases have largely fallen directly to its bottom line.

Although Weyerhaeuser is a REIT, it has a different dividend structure than typical REITs, which are generally required to pass the vast majority of their net income to investors in order to receive their tax benefits. As long as REITs invest primarily in real estate or real estate debt and distribute most of their income as dividends, they are exempt from corporate tax. While triple net lease REITs like Real estate income (NYSE: O) have predictable income streams, Weyerhaeuser does not.

An attractive dividend policy

In order to provide investors with some predictability, Weyerhaeuser changed its dividend policy to one that offers a sustainable quarterly payment throughout the housing cycle and can still be paid during lean years. Once a year, it will pay an additional variable cash dividend, which will ensure shareholders receive 75% to 80% of funds available for distribution (FAD), which is a financial measure the company uses to approximate cash flow. available. It is basically operating cash flow less capital expenses. Note that FAD is not a term used in generally accepted accounting principles (GAAP). It is a company specific term.

So far this year, Weyerhaeuser has earned $ 1.9 billion in funds available for distribution. Its normal quarterly dividend of $ 0.17 per share (or $ 0.68 per year) works out to about $ 511 million if you multiply $ 0.68 by the 751 million shares outstanding. If the company plans to distribute 75% of its ADF, that means shareholders are expected to get around $ 1.4 billion based on the first six months of the year. Subtract the cost of the quarterly dividend and shareholders envision a special dividend of at least $ 1.20 per share, and the company still has the second half of the year to work.

As lumber prices have returned to a level closer to normal, Weyerhaeuser shareholders shouldn’t expect six more months like the first half of the year. In presenting the company’s results, he indicated that the third quarter would be weaker than the second quarter blowout. That said, between the variable dividend (which will be paid in early 2022) and the quarterly dividend, investors are likely to receive at least $ 2 per share, giving the company a dividend yield of 5.9%, which is much better than its “title” yield of 2%.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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