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Weyerhaeuser (WY) Stock a Buy Despite Lower Lumber Prices

·5 min read

Lumber prices are spiraling down, unlike last year, when they had significantly moved up as supply chain issues and homebuilding demand rebounded. Now, as higher home prices and the rising cost of mortgages are affecting affordability, lumber prices are taking a U-turn.

Nonetheless, Weyerhaeuser WY — a leading lumber producer and owner of the world’s most extensive portfolios of timberlands — is one such company that continues to display strength in several areas. Adding the stock to your portfolio will certainly not disappoint you.

Although shares of Weyerhaeuser have lost 16.4% year to date, compared with the industry’s 28.7% decline, analysts are optimistic about WY’s near-term prospects, as is evident from the recent estimate revision trend. Earnings estimates have risen in the past few weeks, suggesting bullish sentiments surrounding the stock. The Zacks Consensus Estimate for 2022 earnings has increased 18.5% and the same for the next year has risen 1.4% over the past 30 days.

This positive trend justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

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Let us delve deeper into other factors that make this stock a profitable pick.

Higher Demand Across Export Markets

The company has been witnessing higher demand across export markets owing to a number of factors. Shipping and logistics challenges pushed up the demand for North American logs in Japan. Trade limitations have impacted the import of Australian logs in China. Additionally, the Russia-Ukraine war has led to the ban of log exports from Russia. Hence, this tightening global wood market is expected to be conducive for Weyerhaeuser.

Rising Carbon/ESG Capital Inflows

More capital inflows for carbon/ESG related projects are likely to prove beneficial for Weyerhaeuser. In March, WY announced an agreement with Oxy Low Carbon Ventures to pursue its first carbon capture and storage project. This partnership combines more than 30,000 acres of Weyerhaeuser's uniquely positioned subsurface ownership in Louisiana with Oxy's proven technical expertise in the management and sequestration of carbon dioxide. The project is expected to come online in 2025 or 2026. This project will mark an important milestone in its goal to grow the Natural Climate Solutions business. WY expects to announce additional carbon capture and storage agreements on portions of Southern U.S. acreage.

Steady Demand for Housing

Demand for housing is still high across the country, and lower lumber costs are yet to be reflected in the cost of housing. However, in the coming months, builders are expected to take advantage of the lower prices, resulting in more affordable housing prices. Moreover, now that prices of lumber have fallen, the time is right for a renovation or a DIY project.

The demand for WY’s products remains favorable, supported by new residential construction and, professional repair and remodel activity. The company’s first-quarter 2022 earnings grew 44% and adjusted EBITDA advanced 36% from the year-ago level to $1.5 billion (its strongest first-quarter adjusted EBITDA on record). Adjusted EBITDA represented 122% increase over the fourth quarter of 2021. The performance reflected solid new residential construction activity as well as repair and remodel activity, which in turn led to improved demand during the period.

Given various macroeconomic tailwinds, the company continues to have a bullish outlook on U.S. housing activity, despite persistent supply-chain issues, the recent uptick in mortgage rates and ongoing affordability concerns. The tailwinds include favorable demographics, and a decade of underbuilding and historically low inventory for new and existing homes.

Consistent Dividend

Rising lumber prices were one of the key reasons behind the company’s attractive dividend yield last year. As lumber prices are falling, does this mean that Weyerhaeuser’s dividend is at risk?

Weyerhaeuser has a unique dividend structure. It pays a normal periodic dividend, a variable dividend and sometimes special dividends. Last year, WY paid a quarterly dividend of 17 cents per share, a special dividend of 50 cents, and a $1.45 variable dividend.

WY also returned $134 million during first-quarter 2022 to shareholders through the payment of quarterly base dividend, which increased 5.9% to 18 cents per share during the quarter. This is in line with its commitment to grow sustainable base dividend by 5% annually through 2025.

The company is also committed to supplement its base dividends each year with an additional return of cash to achieve the targeted annual payout of 75% to 80% of adjusted Funds Available for Distribution.

3 Other Construction Stocks to Buy Now

Other top-ranked stocks, which warrant a look in the Construction sector, include Simpson Manufacturing Co., Inc. SSD, Beazer Homes USA BZH and AECOM ACM.

Simpson Manufacturing — currently carrying a Zacks Rank #2 (Buy) — designs, engineers, manufactures and sells wood and concrete construction products.

SSD’s expected earnings growth rate for 2022 is 18.1%. The Zacks Consensus Estimate for current-year earnings has improved 11.6% over the past 60 days.

Beazer Homes — carrying a Zacks Rank #2 — designs, builds and sells single-family homes. BZH designs homes to appeal primarily to entry-level and first move-up homebuyers. Beazer Homes USA’s objective is to provide customers with homes that have quality and value. BZH’s subsidiary, Beazer Mortgage, originates the mortgages for the company's homebuyers.

Beazer Homes’ expected earnings growth rate for fiscal 2022 is 48.9%. The Zacks Consensus Estimate for current-year earnings has improved 14.6% over the past 60 days.

AECOM — currently carrying a Zacks Rank #2 — is a leading solutions provider for supporting professional, technical and management solutions for diverse industries across end markets like transportation, facilities, government as well as those in environmental, energy and water businesses.

AECOM’s expected earnings growth rate for 2022 is 21.6%.


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