- Weyerhaeuser just split off its homebuilder, WRECO, in a transaction that reduced the share count by about 10% and added $700 million in cash.
- The remaining company is more focused of forestland, which is an attractive long-term investment with reduced labor costs compared to the now removed homebuilder component.
- The reduction to shares is similar to a instant share buyback, which should make it easy for Weyerhaeuser to increase its dividend. The $700 million will also help.
On July 8, Weyerhaeuser (NYSE:WY) completed the split-off of its homebuilding business, Weyerhaeuser Real Estate Company ("WRECO"). This is the most recent divestiture of an asset that is non-core to the company's current focus on being a purer forestland REIT. This transaction leaves WY as a leaner business, with fewer employees, moving parts and outstanding shares, but a $700 million increase in cash.
This divestiture is the largest by Weyerhaeuser since the steps it took prior to converting to a REIT. In advance of WY's conversion, the company divested its containerboard, packaging and recycling business to International Paper (NYSE:IP) for $6 billion, and its paper business to Domtar (NYSE:UFS). WRECO is clearly far more real estate related than these businesses, but the move is a continuation of the plan to become a business that does not make refined products, whether they are corrugated cardboard or a house.
Instead, WY intends on being the supplier of timber and pulp. The resulting company is considerably leaner, because there is more labor involved in clearing land, constructing a house and selling it than there is in growing a tree, sawing it and selling it. This means WY can keep less people on the payroll, which is an especially important factor going forward, where it appears labor costs are likely to increase in the coming years.
Another advantage is that the house is set in a spot, where externalities could reduce demand for it (or increase demand), while the component commodities can travel the world to wherever demand exists. For example, after the Japanese tsunami in 2011, the destruction resulted in increased Japanese demand for construction components. Timber from Canada and the Pacific Northwest can be shipped to meet this demand increase, but constructed homes can only supply the local markets.
Of course, the corresponding concern would be that the more focused Weyerhaeuser is now more sensitive to changes in timber and pulp commodity pricing. This is undeniably true, but commodity prices generally move in proportion to the demand for them. In this regard, construction rates are still relatively mild, and could grow for years. Alternatively, while reductions to demand would reduce demand at that time, the trees will continue to grow and yield more high-quality lumber in the future, when demand does return. This could result in lumpy earnings.
Weyerhaeuser is not the only forestland REIT to be splitting up its business. Rayonier (NYSE:RYN), which owns diverse tree acreage within the United States and New Zealand, just split its business in two, where RYN still holds the forestland and Rayonier Advanced Materials (NYSE:RYAM) is a manufacturer of cellulose fibers that are used for products such as cigarette filters and textiles, as well as certain chemical applications.
Weyerhaeuser has been accumulating forestland, buying some from Longview last year, and the company may want to continue that path. Weyerhaeuser may be interested in acquiring RYN now that it has spun off its materials business. Additionally, there may be some sense to WY further divesting non-core assets by combining its specialty pulp cellulose fiber business with RYAM. Either such deal is a possibility.
Weyerhaeuser increased its dividend twice during 2013, which combined to bolster the quarterly payout by roughly 30 percent. The stronger cash and liquidity position that WY has after shedding WRECO should allow WY to sustain its dividend and possibly increase it in the second half of this year. Current management has indicated it is interested in returning cash to shareholders, making an increase somewhat likely.
The recent tender resulted in about 10 percent of WY shares being converted into TPH shares. The effect upon WY is that there are 10 percent less shares, which is very much like a company repurchasing a tenth of its outstanding shares. This means that if the dividend is unchanged, WY is actually going to be paying out about 10 percent less to shareholders, or that it can increase the payout per share by about 10 percent without actually increasing the company's total payout.
Moreover, the effect of the $700 million cash infusion that WY received from the WRECO split-off is likely to support the company's goal of increasing the capital return to shareholders. I believe it is unlikely that the company would soon repurchase shares with that cash, seeing as how the transaction already acted like a large buyback program and also that shares have performed exceedingly well recently. Nonetheless, it is entirely possible that they would repurchase shares in the event of a sell-off.
Despite that possibility, I believe it is far more likely that WY uses this cash to either increase the dividend or acquire more forestland. With the recent reduction to share count and increase to cash, a dividend increase in the second half of 2014 is almost certain to occur. I anticipate that the company will increase the quarterly dividend by 2 cents, or roughly 9 percent, to $0.24, and that such an increase will not significantly reduce the company's cash position or increase the prior total payout to shareholders. As such, an even more significant dividend increase is entirely possible.
Disclosure: The author is long WY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Family members own WY, RYAM and RYN.