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Weyerhaeuser (WY) Announces its Expected Dividend as a Timber REIT

On December 13th, Weyerhaeuser (WY) announced an annual dividend payment of $0.60 per share in 2011. The first quarterly dividend payment of $0.15 per share is expected in March 2011, following the election of REIT status, effective January 1, 2010, by the company when it files its tax return in early 2011. At that point, the company technically becomes a REIT.

The dividend announcement falls in-line with our expectation of $0.50 to $0.60 per share. [Please see our earlier blog on the topic.] At the current closing price of $17.90 per share, the announced dividend yields 3.35%, compared with the average dividend yield of 5.02% for the timber REITs in the Forisk Timber REIT (FTR) Index: Plum Creek at 4.55%, Rayonier at 4.12% and Potlatch at 6.37%).

Management also stated its intent to target a dividend payout ratio of 75% of FAD (Funds Available for Distribution, defined as cash flow before debt repayments and dividends) over the cycle.  However, in 2011, the payout approximates 100% of FAD as WY does not expect significant improvement in the housing markets and economy in general in 2011.

We consider the target payout ratio of 75% of FAD positive news for WY investors. Why? WY has significant operating leverage as housing markets recover and its Timberland, Wood Products and Home Building businesses are positioned to benefit substantially. Management already stated its willingness to increase the dividend over time. Given the current scenario, WY will continue to defer harvest while the Taxable REIT Subsidiaries (TRSs) generate cash to support the dividend and the debt payments.

WY enjoyed other good news during the day. Standard & Poor’s Ratings Services raised its outlook on the firm from “negative” to “stable” on expectations for improved operating results for the company.

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