On December 13th, Weyerhaeuser (WY) announced an annual dividend payment of $0.60 per share in 2011. This announcement marked a critical moment for the company’s pending emergence as a publicly-traded timberland-owning real estate investment trust (REIT), providing another investment alternative for investors interested in both timber markets and tax-efficient REIT structures. The first quarterly dividend payment of $0.15 per share is expected in March 2011.
At a recent closing price of $17.90 per share, the announced dividend yields 3.35%, compared with the average dividend yield of 5.02% for the timber REITs in the Forisk Timber REIT (FTR) Index: Plum Creek (PCL) at 4.55%, Rayonier (RYN) at 4.12% and Potlatch (PCH) at 6.37%). Weyerhaeuser will be added to the FTR Index effective the first trading day of 2011 on January 3rd.
Weyerhaeuser’s Management stated its intent to target a dividend payout ratio of 75% of FAD (Funds Available for Distribution, defined as cash flow before debt repayments and dividends) over the business cycle. However, in 2011, the payout approximates 100% of FAD as the company does not expect significant improvement in the housing markets and economy in general during the year.
We consider the target payout ratio of 75% of FAD positive news for WY investors. Why? WY has significant operating leverage as housing markets recover and its Timberland, Wood Products and Home Building businesses are positioned to benefit substantially. Management already stated its willingness to increase the dividend over time. Given the current scenario, WY will continue to defer harvest while its manufacturing assets generate cash to support the dividend and the debt payments. In addition, Standard & Poor’s Ratings Services raised its outlook on the firm from “negative” to “stable” on expectations for improved operating results for the company.
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