Here's Why You Should Hold On To Weyerhaeuser (WY) Stock Now

We issued an updated research report on Weyerhaeuser Company (NYSE:WY) on Jan 2. Strengthening timber, land and forest products business as well as the company’s efforts to improve operational efficiency and provide healthy return to shareholders adds to its advantages. However, the growth momentum might get restricted by headwinds rising from international exposure, global uncertainties and rising costs and debts.

Weyerhaeuser currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $26.6 billion.

Below we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Weyerhaeuser

Strategic Initiatives Drive Growth Opportunities: Over time, Weyerhaeuser has undertaken some strategic decisions to help it concentrate on its core timber, land and forest products business. In this regard, divestment of liquid packaging board business, printing papers company (North Pacific Paper Company) and Cellulose Fibers pulp mills in 2016 are worth mentioning. Also, the company continued with its efforts in 2017, having divested its timberlands and manufacturing operations in Uruguay to a consortium led by BTG Pactual's Timberland Investment Group in September. Also, the company sold its 21% equity interest in Twin Creeks Timber in October.

In addition, Weyerhaeuser’s merger with Plum Creek Timber has enabled it to leverage benefits from the gradually improving housing market in the United States. Housing starts in the country are expected to be roughly 1.2 million in 2017.

Attractive Shareholders’ Return: Weyerhaeuser has a sound track record of rewarding its shareholders through lucrative dividend payments. Notably, the company paid dividends of $699 million in the first nine months of 2017, of which roughly $233 million was distributed in the third quarter. In November, the company gifted its shareholders a 3.2% hike in the quarterly dividend rate.

We believe such disbursements are reflective of its strong cash position and capital allocation policy. In the long run, the company aims to achieve dividend payout of up to 75% of funds available for distribution.

Operational Excellence & Impressive Guidance: We believe that Weyerhaeuser’s ongoing operational initiatives are anticipated to support its results in 2017 (results not yet released). It aims to reap a benefit of $40-$50 million in the Timberlands segment, driven by these initiatives. Benefits of $55-$75 million are expected in the Wood Products segment, including improvement of $20-$25 million in oriented strand board, $20-$25 million in lumber, $10-$15 million in engineered wood products and $5-$10 million in distribution.

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Weyerhaeuser anticipates sequentially higher earnings and adjusted earnings before interest, tax, depreciation and amortization from the Timberland segment. Likewise, results in the Real Estate, Energy and Natural Resources segments are predicted to improve sequentially. Also, the company anticipates spending approximately $300 million as capital expenditure for the Wood Products segment while $135 million has been allocated for the Timberlands segment.

Factors Working Against Weyerhaeuser

Poor Share Price Performance & Valuation: In the last three months, Weyerhaeuser’s shares have yielded 3.3% return, underperforming 5.6% growth of the Zacks Investment Research

Written By: Zacks Investment Research