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Weyerhaeuser Distribution Slash Signals A Buying Opportunity

May 04, 2020 5:02 AM ETWeyerhaeuser Company (WY)34 Comments


  • 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

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This article was written by

Daniel Jones profile picture

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.

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Comments (34)

OlafDanielson profile picture
So WY Real Estate debt is pretty much going for par with a 3 yr maturity and a a little over 6, WY main debt is trading way over par including 2 year 7 olus % face stuff with, YTM of under 2% . No distress there.....one wonders why the Real estate subsidiary debt is priced where it is
bobp55 profile picture
Questions -
1) What is the expected value per acre of timberland? I know it varies by location but what about grossly the land that WY holds?
2) What is the value of WY on an intrinsic basis and on an operational basis?

I did a quick calculation based on the latest balance sheet.
Timber and timberland at cost minus depreciation $11,847M
WY land holdings are somewhere between 11mil and 12mil acres. So that puts the value per acre at about $1000. Is this somewhat representative of the true value of the timberland? Note that this doesn't take into account the long term debt, which is $6299M

A quick summary of the balance sheet with rough numbers is

Current Assets $2.5B
Property and Equipment $2.1B (I added in "construction in progress")
Timber and Timberland $11.8B
Misc $0.8B

Current Liabilities $1.8B
Long Term Debt $6.3B
Misc $1.0B
Equity $8.0B

On the balance sheet, equity is $8.082B. Market cap is about $13.6B. Does this mean that the market is valuing WY's operations (taking into account the debt) to be $5.1B?

I invite anyone with thoughts or ideas on this to reply. I'm interested in how others evaluate WY.

Disclosure - I'm long WY but not happy with the dividend suspension. I've been long since Jan 2019 and have added a couple of times since then.

Bob P
OlafDanielson profile picture
Bob, balance sheet assets (land) are cost basis, so 11B value is undoubtedly low. Obviously their residential development land is worth more than standing timber in Oregon, which is more than southern land, I haven't priced timber recently, you can look at what Rayonier is paying for POPE, to get about as good an idea or what WY sold last year around, but Maine land is not worth what Pacific NW land is and also if you are 40 years since harvest, versus cut over, percentage etc, so that is hard. So valuing it here is tough.....
bobp55 profile picture
OlafD - Thanks for the reply. I knew that not all their land is the same. I've always though that the current actual land value was significantly higher than their cost basis. I was just wondering about how much in general it was.

I invested in WY for their land holdings and the dividends that they pay out. The latter is now gone for a while. So the former becomes even more important from an investment point of view. I suppose I could work backwards, which is to assume the market cap is the actual value of the company, put a value on their operations and subtract that from the market cap. Then make the adjustments for cash and debt. What's left is roughly the current value of their land holdings. It's probably not particularly accurate but it might be fun for me to play with.

Bob P
OlafDanielson profile picture
it is diversified so you have to get the acreages/ locations and add up the values independently, some might be worth less than they paid, especially if now cut over, it is a big project. Some land companies, like GCCO for example, (small pink sheet company) owns 30,000 plus acres of irrigated farmland in Kansas, that is a an easy estimate as is KEWL, which has larger chunk of Northern Michigan forests, in those cases you have a mineral kicker, which may or may not have value.......these large patchwork companies like WY, RYN, Acadian non-timber TPL etc, it can be a project, and also land prices today may be lower than land prices 2/1/2020, its tough.........as an aside, GCCO and KEWL bought their lands approx 100 and 120 years ago, so their carrying value on balance sheet is almost nothing......but if they sell something, got to figure in a tax hit unless they sell it all
tomatojuice profile picture
I got out of WY end of last year simply because it wasn't looking good and it was a tax loss harvest. I'm ready to jump back in with prices where they are at. Remember that buying WY shouldn't really be a trading vehicle, but an investment vehicle for the long term. At some point the value of trees will grow.
Visual Capital profile picture
@tomatojuice How do you value WY? I notice it does not report FFO like the rest of the REIT's
WY strong buy, why? With Fed printing out trillions of $ they would soon start begging WY for timber (lol) - not an investment advice.
This definitely is an extreme move to take dividend to 0. Others already addressed the retiree/income class of investor that they stiffed, but they also just eliminated themselves from the mutual funds who invest in dividend stocks ? Surely they could have found some way to dribble out a smaller dividend, but since they did not, . . . one has to really wonder . . . . . .
tomatojuice profile picture
Actually many REITS have cut their distributions for the short term to allocate capital appropriately. Expect it to return in lower amounts or a special divvy
lorddarley profile picture
Will be buying. Never thought it would get this low.
Visual Capital profile picture
@Daniel Jones I agree that cutting the dividend provides an opportunity to pay down debt. My question is, how would you value a non-dividend paying firm with hard assets like WY?

Also, how does it manage the REIT rules of paying out at least 90% of income?
tomatojuice profile picture
@Visual Capital
They will most likely produce a special dividend by the end of the year that allows them to keep REIT status.
REITs have to pay 90% of taxable income. If they have to write down some assets this year, they will certainly have no taxable income.
bobp55 profile picture
Elimination of the dividend was a huge disappointment. WY was one of my income producers. The immediate 20% drop that followed just added insult to injury. I believe WY has a steep wall to climb to get back to where they were before covid-19. It needs to almost double from where it is right now. Whenever the dividend is reinstated, I expect it to be at a much reduced level, maybe 10c to 15c per quarter.

Also, the vast timberland holdings do not seem to be valued as highly as one might expect. I haven't decided yet whether I'll continue to hold or sell. I'm definitely not a happy camper.

Bob P
Since a REIT must pay out 90% of NOI this move would indicate that WY expects to have a net operating loss this year.
Going lower...
edfooyung profile picture
WY is my inflation play. 12 million acres of timber. Hard assets.
mk1992 profile picture
Should also look at WDC, same situation. Green horn management cut divi to 0 and stock got a 12% hair cut May 1st - all while management guided to >$1 non-GAAP for this Q!!! And semi hi season starts after this Q (this part is clockwork for semis going to be beginning days of semis >50 yrs ago). Stock is selling <10 PE (non-GAAP).

All leaves one to stutter, "WTF ??!!"
mk1992 profile picture
Tuesday morning, WDC taking off, 9:45am $41.27 +3.91%. My year end target is $70+, with possibility of even more after the new year if the NAND shortage that I am expecting really happens. But if Chinese enters NAND market, I run for the hills.
mk1992 profile picture
Friday morning, WDC at almost $43.50. Last Friday's 12.6% drop took it down to the bottom of that up channel established since the March low. Short term I expect to go to the top of that up channel at ~$49. If technicals are high then, I'll probably sell it with expectation of buy back in lower to compound the gains.
hope they're not heading down the rabbit hole, but times they are a changin.
We are in a long term bear market
Think of the great depression of 1929
It took 13 years to shake out all the excesses before growth began
It took around 30 years for the DOW to recover
I am putting away 5 years of living expenses before I would buy any stock
In fact I own WY bonds
So maybe instead of stock I will add to my WY bonds
America has done well because it has the reserve currency and never had to balance its budget
Most Americans are addicted to credit
This addiction has to be curbed, and its a long painful recovery,full of fits and starts
I have studied the Great Depression and we are in another one
The bankruptcy laws will be changed to allow states to go bankrupt
This will allow them to reduce their pension payments
Students loan debt is nothing compared to the states unfunded pension obligations
tomatojuice profile picture
How do you go about buying WY bonds? Thanks.
I just checked on Fidelity's brokerage platform. If you plug in some of the CUSIP's they have some available. I'm sure some other brokerage platform's you can buy individual corporate bonds too. If you buy and hold individual bonds that's fine, but bro your going get ripped on spreads as an individual investor if you think you are going to be buying and selling.
bobp55 profile picture
7822751 - True, the spread on some bonds are quite wide but if a bond is actively traded the spreads are not too bad.
jld2589 profile picture
They had to cut their stated payout ratio was 95% and they were selling land just to fund the dividend like a liquidating firm. Hope they turn back into growth mode now and build up cash buy up potlatch or rayonier
wildpitcher profile picture
My guess is that the distribution will be reestablished soon, but at a somewhat lower value than before the suspension.

Other Side Of Trade profile picture
Agree. The CEO compensation will be fully restored or increased, the distribution will be reinstated at a lower level.
I have liked WY for years but as soon as the dividend was cut I sold out. When they start paying a satisfactory dividend for me, I will buy again.
earlyriser profile picture
KWDreamun, by the time they reistablish the dividend the stock will be significantly higher. With all the printing presses glowing red, maybe it is time to look for some real assets. I am not adding today, but that is my next move.
Happy to see top management going down in salary!
Henry Miles profile picture
My sense is that it's worse than, "very uncertain".
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