Move will transfer more profits to Weyerhaeuser's shareholders

By MATEUSZ PERKOWSKI

Capital Press

The price of Weyerhaeuser stock recently plunged as the market reacted to the timber company's upcoming stock-and-cash dividend.

The $5.6 billion dividend must be paid to shareholders as part of Weyerhaeuser's conversion to a real estate investment trust, or REIT, to save on corporate taxes.

"It is the company's previously undistributed earnings since its inception" about 110 years ago, Patricia Bedient, the firm's chief financial officer, said during a conference call.

Most of the dividend will be issued in the form of new stock while the remaining 10 percent will be in cash.

The stock price fell because the company will effectively spread its total worth -- a "market capitalization" of more than $7 billion -- over hundreds of millions of new outstanding shares.

The tactic amounts to a stock split, since shareholders will recoup the value of their stock when the dividend is paid on Sept. 1, said Brooks Mendell, president of Forisk Consulting, which tracks timber companies.

"The nature of your shares changed, but the value didn't change much," he said. "The price is lower but the value is the same."

The dividend will only be paid out to shareholders who owned Weyerhaeuser stock on July 22.

Shortly before that deadline was reached, the firm's stock price fell by $26 per share -- an amount commensurate with the per-share value of the upcoming dividend.

Though the transaction will basically be a financial wash for the shareholders, they will be taxed on the dividend nonetheless, said Robert Gordon, president of the Twenty-First Securities Corp., a brokerage and investment firm.

"It's a taxable dividend that you're getting taxed on even though you're not getting anything," he said. "It's like insult on top of injury."

Gordon said he recommended that investors sell Weyerhaeuser stock to avoid the special dividend. If the investors liked the stock, he advised them to buy it again after July 22.

"You didn't have to sit there and take it," he said.

The good news is that Weyerhaeuser will be able to pay more money to shareholders once its conversion to a REIT is complete, Mendell said.

Under federal law, REITs generally don't pay corporate taxes if they pass through at least 90 percent of their profits to shareholders.

Additionally, proceeds from timber sales are taxed at the capital gains rate, which is typically lower than the personal income tax rate, said Mendell.

Shareholders will actually pay less tax for some of the proceeds they receive from Weyerhaeuser, he said. The company calculates the ratio of profits taxed as capital gains.

"Those all would be attractive things to a shareholder," Mendell said.

As part of its switch to a REIT, the firm had so sell some of its manufacturing assets. The corporate structure doesn't allow companies to derive more than 25 percent of their income from ventures unrelated to real estate.

Once the upcoming dividend is distributed, Weyerhaeuser will have satisfied all the requirements needed to become a REIT, Bedient said. "We will have increased cash flow as the result of the favorable tax treatment of a large portion of our timberland income."

The conversion will also remove about $1 billion in deferred tax liabilities from the company's accounts, she said. "It represents future cash that will no longer need to be paid."