Monday, July 12, 2010

Weyerhaeuser (NYSE:WY): Don't Spend It Too Fast - Credit Suisse

Weyerhaeuser (NYSE:WY) is getting some interesting commentary from Credit Suisse after the co announced the process of paying out its accumulated "earnings and profits" (E&P) as required in a conversion to REIT status.

As it demonstrated at the May 27th analyst meeting, the expected E&P will be $5.6 billion, 90% of which is in stock (effectively as stock split) and 10% in cash. Shareholders owning the stock as of next Thursday, July 22nd, will receive the E&P (and be responsible for taxes on this effective dividend) on or about Sept. 1st.

Here comes the interesting part:

Don't Spend It Too Fast: At Friday's closing price taxable shareholders will incur up $5.70 per share in actual cash tax liabilities (depending on their state of residence), yet the cash portion of the E&P distribution will likely be just $2.65 per share. This means that owners in the upper tax brackets will not only end up paying 100% of the cash portion of the distribution in taxes, but that they will need to cough up another $3 or more for taxes for each share owned. In other words, taxable shareholders in "high tax" states could be required to "transfer” about 16% ($5.70) of their current proportionate economic interest in Weyerhaeuser the tax-exempt (pension/endowment) shareholders given that the E&P "dividend" is such a high proportion (74%) of the current market capitalization.

Sell and Buy It Back: This predicament may increase the stock's volatility over the next 6 trading days (through next Monday, the 19th) as the 20th is apparently the "ex" date. We could see taxable investors sell the stock to avoid this massive, $26.49 per share dividend reflected in their brokerage 1099’s next February, and then buy the shares back after the ex-date. If the stock weakens over this 6-day period, tax-exempt investors may want to take advantage.

Maintain Neutral Rating: We also maintain our $44 target price.

Notablecalls: WY is trading around $38.50-$39.00 this morning. Consider the following:

- The news was clearly expected

- CSFB is saying people are likely to SELL the stock due to tax issues.

This looks like a fading oppy to me.

Also note that UBS is out upgrading WY this morning (+ve on the whole group). The upgrade is unrelated to this news out this morning.

I would not be surprised for WY to give back at least half of this morning's gains over the course of the trading day, putting $37-37.50 levels in play.

Obviously, while I was writing it up the price has escaped us. Sigh.

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