Weyerhaeuser news release offers a surprise

August 16, 2009 

Weyerhaeuser’s news release offers a surprise It was almost a throwaway line, a mere 13-word half-sentence buried in a news release about another subject entirely.

But packed in that baker’s dozen of verbiage was a head-turning message that tells a lot not only about the status and future of one of this region’s historically significant companies but about the philosophy of how major American industrial corporations are structured.

Not surprisingly for this era, those messages are not terribly encouraging.

In a news release issued last month, Weyerhaeuser Co. announced it was cutting its common-stock dividend from 25 to 5 cents.

That news in and of itself wasn’t the cause for a double-take. If anything, the surprising element was that Weyerhaeuser was able to maintain the dividend level as long as it did, given what has happened in its core markets of timber, wood products and housing. With corporations in every sector slashing or eliminating dividends to preserve capital, Weyerhaeuser could hardly be singled out for doing the same.

The real eye-opener was in the rationale the company gave for the cut: Not just the terrible market and plunging revenues, nor the need to conserve capital and cash. In addition, Weyerhaeuser noted, cutting the dividend would provide for the financial flexibility for “a possible REIT conversion should the board make that decision in the future.”

A quick refresher lesson: a REIT (an acronym, pronounced “reet,” standing for real estate investment trust) is a type of corporate structure which greatly reduces its income-tax burden, thus increasing the payout to investors. To qualify as a REIT, a company must distribute 90 percent of its annual profits to investors. The tax code also limits how much a company can hold in non-real estate assets, and how much income it can earn from those holdings, to qualify as a REIT.

Timberland REITs aren’t unusual. Seattle-based Plum Creek Timber converted to a REIT. So did Spokane-based Potlatch.

Some Wall Street investors have been pushing for Weyerhaeuser to do the same, arguing that the company’s pulp, paper and wood products manufacturing assets hold down the market value of the company’s stock price. Concentrating the company in timberlands and real estate would unlock that value, they contend.

Weyerhaeuser’s mention of a REIT conversion is startling for two reasons. One is timing: REIT conversion hasn’t figured much in the conversation recently because little of what Wall Street theorizes is held in high regard these days, and because the market meltdown and the national economic swoon make it unlikely that anything short of a massive recovery in the housing market (the ultimate destination of most of that supposedly undervalued timber) would boost the price of stocks like Weyerhaeuser.

The other is that Weyerhaeuser has been publicly cool to the idea. The company did name a board member with a background in REITs, and in conference calls with investment analysts Weyerhaeuser executives have said REIT conversion is an option and have listed some technical moves to position the company to switch should it choose to do so.

But Weyerhaeuser’s public focus has been to lobby for tax-law rewrites to give traditional corporations the same advantages as real estate investment trusts.

As recently as a news conference following the annual shareholders meeting in April, Weyerhaeuser Chief Executive Dan Fulton addressed the clamor for the company to continue unloading manufacturing assets.

“The manufacturing businesses we participate in today have a home in the portfolio as long as they perform,” he said. “There are some investors that would like a pure play (in timberlands) but fundamentally most investors would be happy if we are doing the best we can with our timberlands, and then we bring along these other businesses that generate a lot of cash and earnings. We have the room to do that. There’s a lot of operating leverage in our system when the market recovers because of our scale.”

And there we land on the big- picture issue. Weyerhaeuser has already done much of the work necessary to qualify as a REIT: selling the fine-papers business to Domtar, selling the containerboard packaging segment to International Paper. It has also closed dozens of mills, some permanently, in pulp, paper and wood products during the recession. Some investors would like to see a further paring down of Weyerhaeuser to little more than, as its tag line once suggested, a tree-growing company. Is that a good idea?

One need not advocate a return to the fully integrated industrial company – steel mills, for example, that owned everything from the iron-ore and coal mines to the shipping and rail lines to the finished-product mills – to believe that a little diversification is a good thing.

Aside from spreading risk around (Weyerhaeuser is, if anything, even more dependent on housing, an industry notorious for its cyclical swings), diversification provides opportunities to participate in sectors that grow. Weyerhaeuser may figure that diversification will come from being an energy play, from both the resources extracted from its lands and fuels such as cellulosic ethanol derived from wood and plant fiber it produces.

As for those lumber and panel and paper and packaging mills? Maybe the company is better off having reduced exposure to those contracting sectors. But that also means reduced opportunity to participate in a rebound, or the development of new markets and applications. There may still come a day when Weyerhaeuser wishes it hadn’t been pressured by Wall Street into unloading those assets and still had them around.

Weyerhaeuser has overdone the diversification bit in its own past, owning stuff like a savings and loan and an annuities company. But those who remember that chapter also will recall another investment theory of that time, that timberlands, the very heart of Weyerhaeuser, didn’t matter, that trees could be bought anywhere. American industrial companies need to be wary that they don’t stake their future on philosophies that prove just as enduring.

Time has demonstrated that Weyerhaeuser can make a nice little business for itself in growing trees. It may well turn out that there’s also a decent business to be had in doing something with those trees once they’re cut and headed for market – provided, of course, you haven’t walked away from that market entirely.

Bill Virgin’s column on business and economics appears Sundays in The News Tribune. He is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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