Weyerhaeuser (WY 0.85%) has a great core business: owning timberland. The problem is that, layered atop this, the real estate investment trust (REIT) has another business that is a bit volatile. The last two years are a great example of why dividend investors need to tread carefully here.
Steady or variable?
Dividend investors generally like to own simple businesses that hand out regular, consistent dividend checks. If the payment is monthly, all the better. If it grows over time, great! (This is why Dividend Aristocrats, a list of the companies that have strung together 25 annual dividend hikes, are so popular.) What dividend investors don't generally like to see are dividend cuts, which can be a real drag for anyone that's trying to live off the income their portfolio generates.
This is the core problem with timber REIT Weyerhaeuser. It wasn't always this way, with the company regularly increasing its dividend, though not annually, between 2010 and 2020. The pandemic caused the company to suspend its dividend briefly before bringing it back at half its previous level.
To be fair, a lot of REITs ended up cutting their dividends during the pandemic, so you can forgive the REIT for that precautionary measure. However, an important dividend shift and what's happened in 2021 should make investors a little more leery of the future here.
Taking off like a rocket
When the pandemic hit, just about everything in the world came to a screeching halt, including construction, which is timber's biggest market. CEO Devin Stockfish summed up Weyerhaeuser's situation pretty well in the REIT's first-quarter 2020 earnings release: "During the second quarter, customer market conditions have deteriorated across our businesses, consistent with the broader macroeconomic environment. As a result, we are taking further actions, including temporarily suspending the quarterly dividend, to preserve liquidity and financial flexibility." It was the right move, given the industry backdrop.
The dividend was reinstated (at half the previous level) at the end of the year, and it has remained the same throughout 2021. However, something material changed, with construction activity picking up dramatically. For a time, lumber prices were, pardon the pun, through the roof, which is notable for Weyerhaeuser because in addition to owning timber properties, it also operates lumber mills.
In the third quarter of 2021, the company's wood products division (its lumber mills) generated revenue of $1.853 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $565 million. That compares to its timber business's $552 million in sales and $165 million in adjusted EBITDA. Some investors might argue that Weyerhaeuser is a lumber company, not a timber REIT, based on those numbers.
But there's some complexity here, because the lumber side of the business had a shockingly good period in early 2021. For example, sales in the wood products division came in at $2.629 billion in the second quarter of the year, with adjusted EBITDA of $1.386 billion. In the first quarter of 2021, sales were $2.021 billion, with adjusted EBITDA of $889 million.
The first thing you'll notice is that sales in this segment seem to have peaked in the second quarter and have now started to head lower, with the third quarter's sales and adjusted EBITDA below that of the first quarter. But what if you look even further back?
Sticking with just the third quarter to keep things simple, in 2020 Weyerhaeuser saw wood products sales of $1.696 billion and adjusted EBITDA of $615 million. In 2019, those numbers were $1.204 billion and $123 million, respectively. The company has gone through some changes here, but the real point is that it's hard to nail down how much cash the REIT is likely to generate from its wood products division in any given quarter. That's especially true right now, because there's a huge amount of variability in lumber prices.
The positive benefit from this is why Weyerhaeuser just paid a special dividend of $0.50 per share. And according to management, there's another big special dividend coming in early 2022. This is in line with the company's dividend policy, which was changed at the end of 2020 to consist of a modest base payment, with supplemental payments if warranted.
The problem is that you can't actually count on these special payments, because lumber is a volatile commodity, so the dividend is essentially variable and largely driven, at least right now, by the performance of the wood products division. If, perhaps when, lumber prices retreat in a notable fashion, investors will get to see the negative side of lumber's commodity nature, and those supplemental dividends could quickly stop.
So what about Weyerhaeuser's dividend?
Owning timberland is not a bad thing, but clearly pairing it with a lumber operation can turn a boring, reliable business into a much more volatile one. Weyerhaeuser, to its credit, is generally well run, but if you are looking at the dividend, the only thing you should consider "safe" is the base payment.
The special dividends are nice, but you can't rely on them. That's bad for investors that are looking to live off of the income their portfolios generate, making this another case of "make sure you know what you own."