New Buy WY

21 Dec 2018 13:05

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I’ve been patiently waiting to buy the timber REIT Weyerhaeuser (WY) and my opportunity came on Thursday’s market drop as I purchased a small position in WY at $22.75/share and a 5.98% dividend yield that will increase my forward annual dividend by $60.

The purchase of WY rounds out my REIT diversification as I now have REIT exposure to the following real estate sectors:

  • Data Storage
  • Entertainment Facilities
  • Hospitals
  • Hotels
  • Industrial Facilities
  • Residential Apartments
  • Retail Stores
  • Senior Housing
  • Timber
  • Warehouses

The only area with no exposure is self-storage companies like Public Storage (PSA) or Cubesmart (CUBE) but that is something I am struggling to understand as the market is so crowded and until I have a better understanding I am avoiding it.

WY recently converted to a REIT in 2010 and has since had a stable dividend payout and had grown their quarterly dividend from 0.15 in 2010 to 0.34/share in 2018. While the dividend has been stable since 2010 there are potential risks going forward.

87% WY’s income is generated from timber and as such its success is without a doubt tied to lumber commodity prices. With the floor dropping out from underneath lumber prices in the second of half of 2018 it does introduce the possibility of a future dividend cut if lumber prices drop further. In WY I was looking for 5% yield but did not want to initiate a position until the stock yielded at least 6% due to the risk of a possible dividend cut. As such I initiated a small starter position in the current $22/share range which gives me protection for a 25% dividend cut and still maintain a 5% dividend yield. Because I do not have a crystal ball where lumber prices are going I probably will not initiate another buy unless the stock price drops below $20/share to help further reduce risk if a dividend drop does occur.

With my gloomy risk position out of the way there are some positives going forward. First, WY is the most efficient publicly traded timber company that allows them to have the best margins in the business that will allow them to whether the downturn in lumber prices.

Another potential is exports. WY’s west coast lumber operations currently has a stable export relationship with Japan but their southern operations have virtually no export exposure and is something they are working on expanding.

The final positive is WY’s reduction in pension liability. In the 3rd quarter WY made a significant pension payment of $300M to improving the funding profile. This action will allow them in 2019 to offer a lump sum payout option to members and for all remaining members those assets will be transferred to an insurance company annuity contract and eliminate their liability going forward.

In summary, regardless of the positives I listed, as an investor you have to recognize and respect the potential volatility in this company with both their share price and dividend payout due to its relationship to lumber pricing. I initiated this position more as diversification than dividend growth so that I have all areas of the REIT economy covered to help stabilize my dividend income.

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