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Is It Safe? Weyerhaeuser Dividends in Doubt

In February, Standard & Poor's downgraded Weyerhaeuser's credit rating to "BBB-minus," one step above junk status, from "BBB," compounding its woes.

The company had negative cash flow for the past two quarters, a trend that will likely continue, said S&P credit analyst Pamela Rice in a report. The 109-year-old firm's 5.7 million acres of forest and other assets "should allow them to weather the remainder of the housing downturn," she said.

Investors have questioned whether Weyerhaeuser should convert into a real estate investment trust, or REIT. The arrangement would force the company to pay 90% of its income to shareholders as dividends. The company would benefit by reducing its taxes.

While rivals Plum Creek Timber (PCL - Get Report), Rayonier (RYN - Get Report) and Potlatch (PCH - Get Report) have taken that route, some analysts question whether the move would help Weyerhaeuser. If the company was to become a REIT, it would have to meet asset and income regulations that might strain its resources or prove too restrictive.

Weyerhaeuser has a few factors working in its favor. The company reduced its debt by 19% last year to $6 billion and boosted its cash to $2.29 billion. It has been closing factories and laying off workers to cut costs.

Those improvements might help Weyerhaeuser short-term, but the company will continue to suffer until consumers start buying new homes again. We've assigned the company a D grade, a recommendation to "sell." Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research, click here now!

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.
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