The difference between 2021 and 2022 for Weyerhaeuser (WY -1.30%) could not have been more stark. During 2021, lumber prices soared based on supply chain issues. In 2022, homebuilding declined as interest rates and inflation picked up.
Weyerhaeuser will be paying its annual variable dividend soon. What should investors expect?
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Weyerhaeuser is a leading timber REIT
Weyerhaeuser is a real estate investment trust (REIT) that owns or manages 24.7 million acres of timberland in the U.S. and Canada. Weyerhaeuser also is a leading manufacturer of wood products, including structural lumber, oriented strand board, and engineered wood products. The company's main market is residential construction.
The main drivers for the company are housing starts and lumber prices. During the COVID-19 pandemic, lumber prices skyrocketed, more than tripling from pre-pandemic levels and peaking in mid-2021. Since Weyerhaeuser's costs didn't move up commensurately, this additional revenue basically just dropped straight down to the bottom line. Lumber prices have subsequently come back to Earth, and are trading below pre-pandemic levels.
Weyerhaeuser has a different dividend structure
Weyerhaeuser has an unusual dividend structure. It pays a normal quarterly dividend that is intended to be stable over the entire housing cycle. It then pays an annual variable dividend that is a function of funds available for distribution. Weyerhaeuser intends to pay between 75% and 80% of funds available for distribution in dividends and share buybacks.
For the full year 2021, Weyerhaeuser paid $0.68 in normal quarterly dividends, a $0.50 special dividend, and a $1.45 variable dividend. Based on the current share price, this works out to be a 8.4% dividend yield.
Weak homebuilding will hurt Weyerhaeuser this year
Weyerhaeuser will be driven primarily by the fate of the U.S. housing market. Unfortunately, 2023 is looking to be weak for housing. This is due to a collapse in affordability. In the spring of 2021, the Federal Reserve began hiking the federal funds rate in order to combat inflation. This drove up mortgage rates.
Second, the easy money and exodus from urban areas caused a spike in home prices. Between rising prices and rates, the first-time homebuyer was more or less shut out of the housing market. Supply chain issues also hurt, as rising costs (not just lumber, but skilled labor and materials) pushed up prices beyond what the market could bear. Builders have dumped properties in bulk to single-family rental funds.
Despite these issues, the supply and demand picture for housing is still heavily skewed toward sellers. The U.S. has underbuilt ever since the Great Recession, and according to at least some estimates, there is a housing gap of 5.5 million to 6.8 million units. Home construction is the classic early-stage cyclical sector, and if the U.S. hits a recession in 2023 it might be one of the first sectors to recover. This is because the Fed usually cuts rates in a recession, and lower rates stimulate the housing sector.
That said, this year will probably be difficult for housing, and Weyerhaeuser will be negatively affected. Investors hoping for a similar variable dividend to last year will probably be disappointed. Net income for the first nine months of 2022 is about 15% below the first nine months of 2021.
At current levels, the ordinary quarterly dividend gives the stock a yield of 2.3%, and Weyerhaeuser will almost certainly pay a variable dividend for 2022. Investors looking to bet on a rebound in housing have the overall macro picture working for them, but they are early. This year promises to be difficult for housing until mortgage rates move lower.
