Weyerhaeuser Co. (WY) announced that it will be issuing approximately 324 million shares as part of its dividend payment to shareholders of record as of July 22. The distribution, based on an average closing price of $15.54 as of August 24, 25 and 26, will increase the company’s share outstanding to 536 million.

Weyerhaeuser will be paying its special dividend worth $5.6 billion on September 1, 2010. The cash portion of the distribution will be restricted to 10% or $560 million.

The estimated stock payment was decided after 66% of the eligible shareholders opted for cash and the remaining 34% for stock payments. Shareholders electing cash option will be paid 15% or $4.03 of their special dividend in cash and the rest in stock.

The special dividend distribution, an important step in the company’s plan to convert to a real estate investment trust (REIT), is inclusive of the regular quarterly dividend payment of approximately $11 million.

The company’s conversion into an REIT will reduce its tax liabilities due to lower taxes on REIT qualifying timberlands income and increased competitiveness in managing its timber portfolio. Reversal of certain tax liabilities will benefit third quarter 2010 financial results by $1 billion.

On the flip side, the stock option will be treated as share issuance for the period after special distribution and will result in an increase in shares outstanding. The increased shares will result in lower EPS in the quarters ahead.

Weyerhaeuser is one of the leading U.S. forest product companies, primarily engaged in growing and harvesting timber. The company manufactures, distributes and sells forest products, and is also involved in real estate development and construction.

Weyerhaeuser’s quarterly dividend rate is 5 cents per share. At the end of the first quarter of 2010, the company paid roughly $11 million in dividends. Cash and cash equivalents at the end of the quarter were $2.1 billion and net cash from operating activities was roughly $190 million.

Weyerhaeuser faces stiff competition from International Paper Co. (IP), Louisiana-Pacific Corp. (LPX) and Canfor Corporation. Also, the industry’s sensitiveness to macroeconomic conditions remains a cause of concern. We are currently maintaining a Neutral recommendation on Weyerhaeuser, which is supported by Zacks # 3(Hold) Rank.

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