Since home prices bottomed in 2012, probably the biggest economic disappointment has been the lack of homebuilding. Historically, housing has led the economy out of a recession, but the post-bubble recovery has been characterized by a lack of homebuilding.
Last year, lumber prices moved up markedly as supply chain issues and homebuilding demand rebounded. Rising lumber prices were a big reason Weyerhaeuser (WY 0.76%) was able to pay income investors a handsome dividend yield in 2021.
It looks like lumber prices are falling back toward normal levels. Does this mean the Weyerhaeuser dividend is at risk?
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Lumber prices have been on a wild ride the past two years
Lumber futures rose from $745 per 1,000 board feet to $1,544 in 2021 before falling back down below $500. This year, lumber prices peaked at $1,320 before falling to around $600 today. Below is a chart of the Producer Price Index for lumber and wood products, which isn't exactly lumber futures, but it tracks it reasonably well.
U.S. Producer Price Index: Lumber and Wood Products. Data by YCharts.
Weyerhaeuser is highly dependent on the homebuilding industry
Weyerhaeuser is a timber real estate investment trust (REIT) that owns or manages close to 25 million acres of timberland in North America. The company also operates 35 factories that manufacture wood products, which are generally used by the residential construction industry. The REIT's bottom line is heavily dependent on lumber prices and the health of the homebuilding industry.
New home sales are down big on a year-over-year basis
New home sales in April fell 17% month over month to a seasonally adjusted annual pace of 591,000. This is down 27% compared to a year ago. Rising construction costs, shortages of materials and labor, and rising mortgage rates have hurt affordability, especially for first-time homebuyers. Perhaps wages will rise enough to offset the drag on affordability, but that will take time, and probably won't matter for this year's numbers.
Weyerhaeuser pays a regular and variable dividend
Weyerhaeuser has an unusual dividend structure. It pays a normal periodic dividend that is meant to be sustainable throughout the entire homebuilding cycle. In addition, it pays a variable dividend and sometimes pays special dividends. Last year, the REIT paid a quarterly dividend of $0.17 per share, a special dividend of $0.50, and a $1.45 variable dividend. Altogether, this worked out to be $2.63 per share or about a 6.8% dividend yield at current prices.
While lumber prices have fallen this year and homebuilding is underperforming, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) still rose 36% in the first quarter compared to last year. While the value of the 2022 variable dividend won't be set until the full-year earnings have been reported, Weyerhaeuser hiked the quarterly dividend this year, and that should be safe.
Any special dividends pretty much can't be predicted. So it is hard to foresee what Weyerhaeuser will pay this year, but initial indications are that it should be at least what it was last year.
