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WY) is basically a leveraged bet on the housing sector -- one with hugely tax advantaged income streams. Weyerhaeuser owns 6 million acres of timberland concentrated in the South and the Pacific Northwest, which it uses to parlay into wood products, cellulose fibers, and real estate. The biggest part of the business, timber harvesting, doesn't get taxed. Instead, at least 90% of earnings must be passed onto investors in the form of dividend income.
By transforming itself from a paper and packaging company into a timber REIT during the height of the great recession, Weyerhaeuser dramatically changed its attractiveness (even if it didn't hugely change its assets). Timber is a very cyclical commodity, and with wood prices coming off of weak demand in the years following the housing bust, WY's positioning is starting to look desirable again.
Like many real estate investment trusts, Weyerhaeuser's balance sheet is more leveraged than a conventional corporation; the combination of a capital-intense business and the requirement to pay out retained income to shareholders make it a certain amount of leverage necessary. With around $3.7 billion in net debt, Weyerhaeuser's borrowing costs are reasonable for its size, and small enough to keep net margins close to 10% last quarter.
As demand for timber products creeps higher, so too should WY's share price.
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-- Written by Jonas Elmerraji in Baltimore.
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