While most stock investors don't pay close attention to them, commodity prices can influence the share prices of natural resource companies. And one commodity that has been soaring in price lately is lumber.
COVID-19-related production declines combined with an unexpected rebound in housing activity have created shortages. What does that mean for Weyerhaeuser (NYSE:WY), a timber real estate investment trust (REIT) and one of the largest operators of timberland in the world?
One of the largest private operators of timberland gets a boost
Weyerhaeuser owns or controls 11.5 million acres of timberland in the U.S., primarily in the Northwest, the South, and the Upper Midwest/Northeast regions of the country. Weyerhaeuser also manages 14 million acres of timberland in Canada. It serves primarily the U.S. and Asian export markets, and most of its revenue comes from the delivery of logs for construction, wood products, and furniture end users.
Since April 1, the wholesale price of lumber is up 135%, driven by unexpected strength in the U.S. housing market. Housing starts have rebounded 60% since April to reach just under 1.5 million. The COVID-19 crisis has increased demand for single-family homes and some of the biggest homebuilders like PulteGroup (NYSE:PHM) reported a 50% increase in orders in June compared to last year. The U.S. and Chinese markets have rebounded from COVID-19-related slowdowns, while Japan is contending with a consumption tax increase that is depressing housing starts.
Weyerhaeuser's stock and earnings correlate well with lumber prices
Below is a chart of the U.S. Producer Price Index (PPI) for lumber and wood products and the stock price of Weyerhaeuser over the past 10 years. The PPI is a better proxy of what is going on in building materials than the commodity futures contracts for lumber. Commodity contracts can be driven by completely transitory considerations, as we saw when oil went negative earlier this year.
You can see that there is definitely a correlation. Weyerhaeuser's trailing 12-month earnings before interest, taxes, depreciation and amortization (EBITDA) correlates well with the U.S. PPI for lumber and wood products. The last time lumber prices were at these levels (early 2018), EBITDA and the stock price were much higher.
When will Weyerhaeuser reinstate the dividend?
As a general rule, each $0.10 increase in the price of lumber translates into an added $11 million in quarterly EBITDA. In 2018, when we last saw peak prices in lumber, Weyerhaeuser earned $0.99 per share. The company also paid $1.32 per share in dividends. Current estimates are for $0.86 a share.
Weyerhaeuser suspended its June dividend to conserve cash, but if it reinstated the $0.34 dividend it would translate into a 4.8% dividend yield going forward. In the second quarter, Weyerhaeuser earned $0.10 per share compared to $0.17 a year ago, so given the uncertainty of the COVID-19 crisis, suspending the dividend was prudent. Historically, Weyerhaeuser has paid out about 85% of its cash flow as dividends, and CEO Devin Stockfish said that the board of directors would like to reinstate the dividend "sooner rather than later," but it wants to make sure the recovery is sustainable.
Ultimately a global growth story
Ultimately, Weyerhaeuser is going to be driven by global demand, and it will behave somewhat more like a cyclical stock and less like a financial. During the second-quarter earnings call, Stockfish was "cautiously optimistic" about a continued improvement in U.S. housing.
Once homebuilders start reporting third-quarter earnings, we will get a better read on the housing sector, although order growth (which leads deliveries) has been strong at virtually every builder. Weyerhaeuser stock is still down about 7% this year, and it has lagged behind the move higher in lumber prices.
If the recovery in housing continues, Weyerhaeuser should benefit from the increased lumber prices.