Weyerhaeuser Taking Steps To Improve Margins

Aug.24.14 | About: Weyerhaeuser Co. (WY)

Summary

Weyerhaeuser posted better than expected results. It also increased its dividends by 32 percent and initiated a share repurchase program of up to $700 million.

With the recently announced divestment the company is all set to focus on its key high-margin operating segments.

In addition, the company is seeking industry-leading operational excellence and has enacted concrete steps towards cost reduction that will result in improved margins.

Weyerhaeuser (NYSE:WY) recently announced a dividend of $0.29 per share reflecting an increase of 32 percent from the previous quarterly dividend of $0.22 per share. It is of worth mentioning here that including the recent increase the company has increased its dividends by 93 percent since 2011. In addition to the increased dividend the company also announced a share repurchase program of up to $700 million. In the wake of recently declared dividends and the share repurchase program the company's stock price jumped 9 percent from 31.20 to $34.10 within the last couple of weeks. It is also worth noting that with the recent bullish sentiment the stock price broke its 52-week high record (see figure below).

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Source: Finviz.com

The dividend announcement was the trigger event that caused the stock price movement but I believe that the increase was also supported by the company's recent steps. These steps have led the company in a direction that will ensure bright long-term prospects. It shall be desirable to discuss the future outlook of the company in light of these steps.

In an effort to focus on growing areas, Weyerhaeuser recently announced the divestment of its homebuilding and real estate company, WRECO. As a result, WRECO became a wholly owned subsidiary of TRI Pointe Homes. The transaction has resulted in a cash inflow of $700 million. The company's portfolio after the divestment of WRECO is shown below.

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Source: Investor Road Show

The divestment is expected to strengthen the growth prospects for the company as the proceeds are to be utilized in the core forest products business. WRECO was considered a lower margin business so its divestment seem to be a strategic move allowing the company to focus more on high-margin operating segments such as the Timberlands segment.

Seeking Operational Excellence

During the second quarter of 2014, the Timberlands segment posted revenues of $539 million reflecting an increase of 5 percent from the previous quarter's $514 million. Going forward, the company expects higher demand and prices for timber and wood products driven by rebounding housing markets. Moreover, the company is also putting efforts into filling the gap created as a result of the Canadian timber supply shortage. Similarly, growing demand is expected from the offshore region. The company is targeting EBITA improvements of $50-$70 million due to operational excellence. Similarly, the company seems to be determined to capture full value from the Longview timber acquisition and is targeting EBITDA improvement of $20 million.

In addition to the Timberlands segment, the wood products business also reported better than expected results primarily due to higher volumes and lower costs. During the quarter, the company generated EBITDA of approximately $423 million. However, going forward the company is determined to achieve industry leading cost structure for both operating heads in the segment, lumber and OSB. To do so, it has been putting efforts into reducing controllable manufacturing costs and improving the product mix. Similarly, the company is also targeting reducing controllable costs in the cellulose fibers segment. It is anticipating reducing costs by $25-$30 million by the end of 2014.

Concluding Remarks

The increase in dividends, coupled with the share repurchase program has further strengthened the company's ability to return cash to its shareholders. In the words of Doyle R. Simons, president and chief executive officer, "This significant increase to our quarterly dividend coupled with our share repurchase program reflects our confidence in the company's ability to continue to improve operating and financial performance and is further evidence of Weyerhaeuser's ongoing commitment to return cash to our shareholders".

Similarly, the divestment of WRECO is another strategic step that will allow the company to enhance its focus on high-margin operating segments. In addition, the company also plans to divest its home building unit. The divestment is aimed at generating approximately $1 billion during the third quarter of 2014. Moreover, since the company is putting efforts into strengthening its operational fundamentals I believe that the company is well positioned to increase its dividends in the quarters and years to come.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.