Weyerhaeuser’s Special Dividend: Thinking Through Shares and Taxes

21 07 2010

In a previous post, we detailed the timeline that would play out once Weyerhaeuser (WY) declared its special dividend, which is the final step required by the IRS for WY to complete its REIT conversion.*    WY pulled the trigger on July 12, 2010, declaring the special dividend of $5.6 billion.  Neena Mishra, Forisk’s Director of Equity Research, summarizes the results and implications for shareholders:

This special dividend represents the previously undistributed earnings since  inception that must be distributed to WY’s shareholders by the end of the year for which REIT status is effective. 90% of the special dividend ($5.04 billion) will be in stock (like a stock split) and 10% ($560 million) will be in cash. With shares outstanding numbered at 211.6 million, the per share amount would be $26.47 ($23.82 in stock form and $2.65 in cash).  The expected payment date is September 1, 2010 to shareholders of record on July 22, 2010. On the ex-dividend date (July 20, 2010), the share price adjusted to reflect the special dividend as follows:

  • Closing price per share on July 19, 2010:   $41.83
  • Special dividend per share:   $26.47
  • Adjusted share price ex-dividend:   $15.36

The shares opened today at $15.36 and moved higher during the day.

The actual number of shares to be issued by WY for the stock portion of the dividend will be determined by the average of the prices on August 24, 25 and 26. However, we can approximate the number of shares to be issued by the current market price:

  • Current market price per share:   $16.00
  • Stock portion of the dividend:   $5.04 billion
  • Approximate number of shares to be issued:   315.0 million (5.04 billion/16.00)

As a result of the stock dividend, the number of shares goes up substantially from 211.6 million to approximately 526.6 million.  Alternately, we can say that the stock dividend equates to a 2.5 for 1 stock split.  We note that the company is already considering a reverse stock split following the special dividend payout to reduce the number of shares outstanding.

The distribution is taxable to shareholders, who may pay 15% (or more) on the entire distribution of $26.47 per share or a tax of $3.97 per share.  If electing a 90/10 split for their distribution, shareholders will receive only $2.65 per share in cash. Due to tax implications, some investors might have refrained from buying shares or sold shares over the past few days.

We expect that the shares will see more upside in the coming days as (1) investors who sold or refrained from buying due to tax implications buy shares and (2) shares become more attractive to income oriented investors.  Management’s stated goals include growing its timber business, reducing debt and paying a competitive dividend going forward, most of which will be taxed as capital gains.  WY’s current dividend yield is 0.5% as opposed to the much attractive dividend yields of timber REIT peers PCL (4.7%), PCH (5.9%) and RYN (4.4%).

*This theme will be addressed further during the “Applied Forest Finance” and “Valuing Timber REITs” courses on August 4, 2010 in Atlanta, Georgia

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