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Forest products maker and homebuilder Weyerhaeuser Co (WY) said it would pay a $5.6 billion special dividend as part of its conversion to a real estate investment trust, sending its shares up 6.4 percent in morning trading.

For each share held, stockholders will receive $26.47, based on a calculation using Friday's closing stock price of $35.84, the company said on Monday.

About 90 percent of the dividend will be in stock, adding 538 million shares and more than tripling the company's share count, using the same metric of Friday's close, it said.

Now, WY is doing this because they want to convert to a REIT, (Real Estate Investment Trust) which requires them, according to the company, to payout the "company's previously undistributed earnings since its inception." This is where the $5.6 billion dollar number comes from.
What I find absurd is that they are allowed to "pay" these undistributed earnings out in cash or stock. Look - when they "pay" 90% of a dividend in stock, they're not "paying" out anything - it's just like a stock split. When a stock splits 2 for 1, for example, that's a 100% stock dividend. You receive 100% of the "value" of your current holdings in new stock - if you had 100 shares, you now have 200 shares. Of course, this dilutes the shares outstanding, and the price adjusts accordingly (down 50%, in the case of a 2-1 split), and no value is created -nothing is "paid" out to shareholders.
The company, on the call this morning, noted:

The distribution can be made with the combination of stock and cash and the entire distribution is taxable to shareholders as an ordinary dividend.

The entire distribution is taxable! Not just the cash portion! The Reuters article was astute in noting:

Shareholders who receive the special cash dividend will, in effect, assume most of the company's tax burden.

But wait - it gets better. The company said it had discussed the possibility of a reverse stock split with its board, but will wait until after the distribution to further explore that possibility!
So, first they do what boils down to a stock split (with some cash thrown in too), restructuring their tax liabilities, and then will consider a reverse stock split! Talk about a tax loophole. Magic.
Note: I have no position in WY - and there may well be future value for shareholders in this transaction based on the fact that as a REIT, WY will be able to distribute future earnings to shareholders with favorable tax treatment (from the company: Another benefit for shareholders is that most of the dividends received from a timber REIT is capital gain in nature. Capital gain dividends are traditionally tax at rates more favorable than ordinary dividends and they can be used to their full extent to offset capital losses.) - but it's shocking to me that they are allowed to meet the REIT requirements of "paying" out prior accumulated earnings by giving their shareholders more stock.
Source: Tax Loophole of the Day: Weyerhaeuser Edition