One of the most critical issues facing the U.S. economy right now is a housing shortage. Ever since the housing bubble and Great Recession of 2008, the U.S. has underbuilt, with housing starts only recently touching historical averages. According to the National Association of Realtors, the supply of homes for sale fell to a record low of just over 1 million at the end of February.
At the same time, lumber prices have tripled over the past year. Weyerhaeuser (WY 1.38%) is the premier timber real estate investment trust (REIT) in North America, and it's in good position to capitalize on this shortage.
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The housing backdrop is the best in a decade
Weyerhaeuser is one of the world's largest private owners of timberland, controlling or managing a total of 24.8 million acres of timberland in the United States and Canada. It is also one of the biggest manufacturers of wood products, including structural lumber, oriented strand board, and engineered wood products in 35 factories in the U.S. and Canada.
At a recent investor conference, CEO Devin Stockfish characterized the housing backdrop as the best in a decade. He cited several reasons, including a new preference for larger, single-family homes; extremely limited for-sale inventory; aging housing stock, and work-from-home policies enabling migration to more-affordable areas. In addition, rising home prices and low mortgage interest rates are driving record home equity. And 59% of Weyerhaeuser's revenue comes from residential construction.
While the demand for residential construction is a key driver, engineered wood products are beginning to replace concrete and steel in building construction. Cross-laminated timber (CLT) is emerging as a popular choice in construction. Its strength and durability allow it to be used in mid- and high-rise buildings. Mass timber is another structural material gaining popularity due to cost and environmental advantages. Since these products are pre-fabricated, they cut down on construction time and expense. And they can replace concrete in many applications.
Weyerhaeuser has an unusual dividend structure
Weyerhaeuser is structured as a REIT, which means it has to pay out most of its taxable income to shareholders. That makes it an attractive candidate for income investors -- but it's not as straightforward as most REITs.
Weyerhaeuser's dividend structure includes a regular quarterly $0.17-per-share base dividend, and then an annual variable dividend. The new structure was implemented last year, and the first variable dividend is expected to be paid in the first quarter of 2022, or about a year from now. The company intends to pay shareholders about 75% to 80% of funds available for distribution via dividends and share repurchases. Cash above that amount will fund growth and debt paydown. The idea is that the base dividend will be supported even in adverse market conditions like the 2008-2010 period. With lumber prices at such high levels, Weyerhaeuser's first variable dividend could be substantial.
Unlike most REITs, Weyerhaeuser doesn't use funds from operations (FFO) for its relevant earnings metric. It uses adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Last year, the company generated $2.2 billion in adjusted EBITDA, or about $2.94 per share. At Friday's closing price, this works out to be about 12 times trailing EBITDA per share. Analysts see earnings per share rising 44% in 2021, so you'd be getting a stock with a low-double-digit multiple and mid-40s expected growth. Income investors will find the 1.9% base dividend attractive enough, plus there will be a potentially large payout in a year. Weyerhaeuser investors are set to win in 2021.
