Last year at this time, lumber prices were skyrocketing, as anyone who worked on a do-it-yourself project knew. Lumber prices more than doubled in 2021, which helped timber real estate investment trust (REIT) Weyerhaeuser (WY -0.25%) report big gains in earnings and dividends. Lumber prices have come back down to Earth this year.
What does this change mean for Weyerhaeuser investors?
Weyerhaeuser is a timber real estate investment trust (REIT) that owns or manages 24.7 million acres of timberland in the United States and Canada. The company also manufactures lumber products, including structural lumber, oriented strand board, and engineered wood products. The company's fortunes are mainly driven by demand for materials related to housing construction.
House prices rose at a 17.7% clip on a year-over-year basis in the second quarter, according to the Federal Housing Finance Agency House Price Index. A lack of inventory was the primary driver for rising prices. At the same time, mortgage rates are on the rise as the Federal Reserve increases the Fed Funds rate. These two issues caused housing affordability to decline, which is somewhat lowering housing demand. Housing starts now show a decline on a year-over-year basis.
Declining residential construction helped cause lumber prices to fall by 63% since peaking in March. Since Weyerhaeuser is highly sensitive to lumber prices, this will undoubtedly flow through to earnings.
Weyerhaeuser's dividend structure is unusual. The company pays a normal quarterly dividend of $0.18 per share, which is meant to be sustainable throughout the entire housing cycle. In addition, it pays an annual dividend at the beginning of the year, which reflects the funds available for distribution over the previous year. In early 2022, Weyerhaeuser paid a special per-share dividend of $1.45. It also paid another special dividend of $0.50 per share in October of 2021. So over the past year, the company paid out $2.66 of dividends per share in total. At current stock prices, that would imply a dividend yield of 8.6%. Given that lumber prices fell so much this year, it is hard to imagine the full-year dividend will come in at the same level it did last year.
In the second quarter of 2022, the company reported earnings per share of $1.06, which was down 22.6% compared to a year ago. Revenue fell by 6% and the cost of sales increased 13%. The decline in revenue was driven by flagging demand for lumber, while the increased cost of sales was due to increased freight costs and rising raw materials cost for its engineered wood products. Note that lumber costs averaged $850 per 1,000 board feet (MBF) during the second quarter. Prices are currently about $481/MBF, or about 43% lower. This would imply a substantial decline in revenue for the third quarter. In addition, according to freight indices, production costs have not declined meaningfully.
Given all of this, the third quarter should see a big decline in earnings, which would lower funds available for distribution. Investors should not look at Weyerhaeuser's past dividend and imagine they are going to paid similarly this year. The $0.18 normal per-share dividend is safe enough, but the variable dividend will be, well, variable.
That said, the longer-term story for Weyerhaeuser remains intact. The U.S. is suffering from an acute housing shortage, as the country has under-built since the Great Recession. The use of engineered wood products continues to expand, and the company also gains revenue from ancillary services on its timberland. That said, investors hoping for a repeat of 2021 will be disappointed.