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Weyerhaeuser ( WY) has slashed its dividend by more than half, but it's unclear if the company will be able to generate enough profit to keep paying it.

Analysts expect the lumber producer to lose money at least through next year. If the homebuilding industry doesn't recover, the company might have to reduce or eliminate quarterly payments to shareholders. Last month, Weyerhaeuser slashed its dividend to 25 cents a share from 60 cents.

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The collapse of the U.S. housing market is sapping earnings at Weyerhaeuser. The company lost $8.61 a share last year after losing $1.15 in 2007. Analysts estimate it will lose $2.20 a share this year and 75 cents in 2010. A prolonged slump in homebuilding could extend the company's streak.

Investors had come to expect growing dividends from the Washington-based company, which has boosted its payout 5.1% a year on average for the past five years, according to Bloomberg data. For the past 12 months, Weyerhaeuser's dividend yield was 5.7%, outpacing the 3.3% average of companies in the S&P 500 index. The yield is projected to drop to 2.8% in the next year.

Weyerhaeuser executives face a simple question: Should the company keep giving shareholders 25-cent dividends each quarter if it lacks the income to finance the payments?

Weyerhaeuser's stock price, which topped $85 a share in March 2007, fell below $20 last month. The shares have plunged 44% in the past year. They tumbled more than the S&P 500, which sank 38%, but outperformed the 50% drop of S&P's index of timber companies.

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), Rayonier ( RYN) and Potlatch ( PCH) 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."

TheStreet.com 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 TheStreet.com Ratings. Prior to joining TheStreet.com, 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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