There is nothing like having a discussion about stocks and having one that the two of us hang up our phone, fire up our laptops, and begin intensely researching. Today, we both discussed a consumer staple stock with a brand portfolio that is matched by few. In our quest for finding undervalued dividend growth stocks, we wanted to take a deeper look at Newell Brands, Inc. (NWL) today and run the company through the Dividend Diplomats’ stock screener.
Why is Newell Brands (NWL) on our radar?
If you have followed along here, it shouldn’t be a surprise that a diversified consumer staples brand has found its way to our radar. Newell has some of the top brands in nearly corner of your house. This includes cookware (Calphalon and Mr. Coffee), storage (Rubbermaid), Writing/Crafts (Sharpie, Elmer’s glue, Mr. Sketch), outdoor (Contigo), Baby products (Graco), Candles (Yankee Candle), and Sports (Rawlings). See what we are talking about? How many of you can find those brands throughout your house?
In addition to the fact that we love the strong brand portfolio discussed above, the company’s stock price has had a rough couple of months. The company is down 23% and 95% quarter and year to date, respectively. Obviously when a stock price realizes such a large decrease in a short period of time, it is going to jump on our radar. Further, one comment from Captutando Dividendos on Lanny’s Hormel (HRL) purchase, stated that we should check out. We though, why the heck not? We scoured the investor relations page to see what is going on with the company.
In a recent press release, management lowered their earnings guidance for the year due to the impact of Hurricane Harvey. The hurricane has negatively impacted many of the company’s resin suppliers, increasing the cost of a key material in the company’s manufacturing process. In the release, management lowered the company’s normalized earnings guidance to $2.95 to $3.05 from $3.00 to $3.20. In addition, management highlighted that they are going to continue to increase investment in products, despite increased costs. The earnings release started the downward trend and despite a short positive swing at the end of September, the company’s stock price has not been able to recover.
Dividend Diplomats stock screener – Newell (nWL)
Time to run NWL through the Dividend Diplomats’ Stock Screener . For the purposes of our stock screener, we will use the low-end of management’s revised earnings range of $2.95 to $3.05 to calculate the metrics below. Using $2.95 will provide a conservative estimate for each of the metrics compared to the high-end of the range and the average analyst estimates that exceed this mark.
Metric #1 – P/E Ratio Less than S&P 500 – ~13.6X – PASS – With an average market multiple in the mid 20s based on the source used for the S&P 500’s P/E ratio, NWL is currently trading at a very nice discount compared to the market. This is less than what our top end range typically is and shows nice signs of undervaluation here. Further, analysts are predicting $3.29 for 2018, which is higher than the earnings estimates used in our calculation and would result in an even multiple.
Metric #2 – Payout Ratio Less than 60% – 31% Payout Ratio – PASS – NWL is not the highest yielding dividend stock, so this isn’t a shock to us since most companies with a low yield maintain a low payout ratio. In fact, we would be very concerned in NWL was close to our threshold or was well in excess of the amount! There is plenty of room for management to continue growing their dividend (if they choose to do so). Also, see why we think this is the most important metric during difficult economic times. HRL’s dividend yield of 2.28%, is higher than the average S&P 500 yield of 1.89% as well. Very similar to Hormel (HRL), at this point.
Metric #3 – History of Increasing Dividends – FAIL – In May the company announced a 21% dividend increase to $0.23 per share per quarter from $0.19. Now that’s what we are talking about. Despite the awesome dividend increase, the company does not have a consistent track record of annually increasing their dividend. NWL has paid a dividend annually since 1972 (per the company’s investor relations page); however, they haven’t maintained a long dividend increase streak since before 2001. From 2001 to their eventual dividend cut in 2009, management maintained a $0.21/share quarterly dividend. After the dividend cut in 2009, the company maintained a solid annual increase streak until 2016 (when management did not increase their dividend). Therefore, the increase announced in May begins a new streak, starting at 1! This obviously differs from Hormel (HRL), Lanny’s recent purchase, where they had > 51 years of consecutive dividend growth. This is the one downside to Newell (NWL).
Metric #4 – 5-year Average Dividend Growth Rate – 20.44% – Despite not increasing their dividend in 2016, the company still has an average five year dividend growth rate of 20.44%! This is incredible given the fact that management did not increase their dividend for one of the five years in this calculation. Looks like management was aggressively trying to rebuild their dividend after the 2009 dividend cut. Very solid, with a low payout ratio, management can keep a steady dividend increase going forward in 2018.
Metric #5 – 5-year Average Dividend Yield – Their 5 year average dividend yield stands at 1.80%! Therefore, Newell currently trades with a yield that is 48 basis points higher than their average historical yield. This is yet another sign of an undervalued dividend paying stock, no doubt.
Bonus Metric – Share Repurchase Program – We will choose a dividend any day over a share repurchase. However, as we have discussed in the past, share buyback (repurchase) programs can provide a huge benefit to dividend investors by reducing the company’s share count, increasing EPS, and ultimately reducing the company’s payout ratio. Why did we bring this up? Well, because at the tail end of September, NWL announced the company is going to resume their share repurchase program. At NWL’s current price, management is authorized to purchase approximately 6.3m shares. As of July 31, management had 490.1m shares outstanding per the 10-Q, so the share repurchase program could have a nice impact on their share count if management elects to maximize their repurchases (a little over 1% of shares outstanding).
Newell (NWL) stock analysis conclusion
So what do you think? Do you love the brands of Mr. Coffee, Crock Pot, Yankee Candle, Rawlings, etc. as much as we do? Did you know that one company owned this endless list of consumer staple brands? Consumer staple always equals safety, and with those dividend metrics above (outside of the dividend history), it will be hard to not pick up some.
What do you think of the company? Do you have any Newell products in your cupboard, on your counter or even in your closet? You open up Lanny’s cupboard and he has a Crock Pot, Mr. Coffee, a few Yankee Candles, and his girlfriend has a Contigo. While Bert possesses the same brands and was cooking dinner the other night on his Calphalon set that him and his wife received as a wedding gift. It’s insane.
Do you like these metrics above? Are you nervous about the industries they have products in at all? What is the one positive and one negative you see in them we are not seeing or haven’t pointed out yet? Thanks for stopping by and looking at this dividend stock, as the goal is to always make every single dollar count when it is deployed! Talk soon, good luck and happy investing!
-Lanny and Bert, The Dividend Diplomats