- The management team at Weyerhaeuser decided to cut the company's distribution to $0.
- This and other developments helped to push shares of the company down significantly.
- Long-term investors should consider this a buying opportunity, with an eventual return of the distribution creating a strong income source.
- Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Get started today »
All sorts of investors make up the market. For some of them, the most important thing is not capital appreciation (though that’s certainly desired), but consistent and preferably growing distributions over time. These distributions serve as cash flow, whether to fuel retirement or for other, more immediate, purposes. A huge draw for these types of investors are REITs because of the ability of those firms to pay out hefty dividends that often result in yields that are higher than non-REIT firms.
To see a REIT reduce or completely get rid of its payout causes a huge blow to investor sentiment, with the end result typically being a major exodus of investors from the company in question. It may be these instances, though, when shareholders are best advised to consider buying into the companies in question. One business that just cut its distribution to zero that is certainly worth keeping in mind is Weyerhaeuser Company (NYSE:WY).
Good developments carrying bad news
On May 1st, shares of Weyerhaeuser tanked nearly 18%, closing down at $17.97 apiece. The development occurred despite some strong financial results posted by management for the first quarter of its 2020 fiscal year that was undercut by a decision by the firm to cut its dividend to $0 for the foreseeable future. Before we get to the distribution decision, as well as other cost-cutting plans and what management sees the near future looking like, we should pay some attention to the firm’s first quarter results.
For the first three months of the company’s 2020 fiscal year, the picture was robust. In fact, at first glance, it’s hard to see why the market has turned so violently against Weyerhaeuser. Net sales, for instance, came in at $1.73 billion. This was up 5.2% compared to the $1.64 billion the firm saw the same quarter last year. Instead of the $289 million net loss the company saw in the first quarter of 2019, its first quarter saw a profit of $150 million this year. Adjusted EBITDA grew from $365 million to $413 million year-over-year, and the company saw operating cash outflows of $14 million turn into inflows of $86 million.
*Taken from Weyerhaeuser
Not all performance across the business was even though. In fact, two of the firm’s three segments performed rather poorly. Net sales for its Timberlands business fell 11.6% year-over-year, while segment profits dropped 12.5%. Real Estate & ENR fared better on sales, seeing a decline of just 5.1%, but its segment profits plunged 34.5%. Only the firm’s Wood Products segment did really well, with sales soaring 12.9% and segment profits up 94.2%.
Some big changes have taken place
Despite the overall positive performance boasted by Weyerhaeuser, shareholders have become disenchanted by the firm. The biggest reason why, it appears, is the move by the firm to cut its distribution. Previously, the company’s distribution per share was $0.34, which worked out to $1.36 on an annualized basis. The decision to cut this figure to $0 is drastic and it literally eliminates the entire reason many investors bought into the company to begin with.
While this is bad news for yield-seeking investors, there’s a huge benefit to the firm. In short, management has been paying out a lot of cash each quarter. For a full year, given the number of shares Weyerhaeuser has outstanding, this will save it cash distributions of $1.01 billion. Assuming the company still generates enough cash to pay out such a distribution, this allows the firm the ability to pay down a great deal of debt if they wish it to be so. Net debt as of the end of the latest quarter was $5.97 billion, so one year’s worth of distribution payouts would total 16.9% of that figure. This is not to say that the payout cut will last that long. In fact, management stressed that this is ‘temporary’ because of the change in market conditions.
If the rest of 2020 were to look like the first quarter of it, then cutting the distribution entirely could be seen as going overboard, but this is not to be the case. For all of 2020, management expects its Southern fee harvest to be reduced by 10%. There should be no impact to its Western fee harvest. The business also expects, for its Real Estate & ENR segment, to see second quarter earnings and EBITDA come in $20 million lower than what was seen in the same quarter of 2019.
The biggest pain, perhaps, will come from its Wood Products business moving forward. In April alone, Weyerhaeuser reduced its operating capacity for lumber by 20%. Its oriented strand board capacity was reduced by 15%. For its entire engineered wood products business, the company cut capacity by between 15% and 25%, and it expects to cut this by a further 10% in May. It’s uncertain what subsequent months will look like, but it’s unlikely business will just spring back.
To address these concerns, management has taken on a number of other cost-saving initiatives. For starters, the CEO has seen a voluntary salary reduction of 30% for the remainder of 2020. The rest of the senior management team will see a reduction of 10%, while the Board of Directors will see fee cuts of 20%. These are all excellent signs of leading by example. Through furloughs and other actions, the company hopes to reduce operating expenses by $55 million for the year. They also will see $25 million worth of federal payroll tax get deferred into 2021. Perhaps the biggest move, though, besides the distribution cut, was the $90 million reduction in planned capex from $360 million to $270 million. This was made possible by the deferral of some discretionary projects.
Earlier this year, management issued some bonds aimed at refinancing some of their nearer-term maturities. Without factoring in the cash from those bonds, the firm has $700 million worth of cash on hand. This was made possible by the decision of the firm to tap $550 million on its revolving credit facility just in case it needs the liquidity. This still leaves it with $950 million that it can tap. I see this last move as a bit overboard and I believe it may have had a role to play in causing investor panic. If the facility were coming due near term, I could see this as a good defensive play of sorts, but it doesn’t mature until 2025.
Usually when you see a company tap a facility like this for the sake of having extra cash, it’s a sign the company in question is going bankrupt and plans to use proceeds both as leverage in the bankruptcy process and to help fund operations during those dark times. Weyerhaeuser is nowhere near being a bankruptcy candidate unless there’s something fraudulent going on. So what was probably a move by management aimed at being extra conservative and safe is probably having the opposite effect from the view of a shareholder.
Based on all the data provided, it’s clear that the near future is going to look very uncertain for Weyerhaeuser. Investors should be prepared for volatility. Having said that, management is jumping at the chance to cut unnecessary cash outflows and this should be applauded. At the end of the day, the company’s products will be needed in modern society, even if demand is weak for the next year or so. When the recovery comes, the firm might even be in a better financial position than it is today, which should help to propel its value higher.
In the meantime, investors who do decide to buy into the firm are forgoing a payout for now, but with shares where they are, once the payout has been re-established to where it was before the cut, investors buying in today will be able to be happy locking in a forward yield of about 7.6%. That’s not bad, even if you have to wait a bit to get it.
Crude Value Insights offers you an investing service and community focused on oil and natural gas. We focus on cash flow and the companies that generate it, leading to value and growth prospects with real potential.
Subscribers get to use a 50+ stock model account, in-depth cash flow analyses of E&P firms, and live chat discussion of the sector.
Sign up today for your two-week free trial and get a new lease on oil & gas!
This article was written by
Daniel is an avid and active professional investor.He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.