Newell Brands (NWL) has had a rough time in the past couple of years. The stock topped in the mid-$50s in the summer of 2017, but has fallen by more than two-thirds since then. Indeed, shares are down more than 15% in 2019 alone even after a strong rally off of the recent Q1 earnings report. Investors have been less than impressed with the company’s strategic direction and its shaky results in the recent past.
However, we see Newell as highly attractive for a variety of reasons, not the least of which is the compelling valuation the stock trades for today. In addition, the lower share price has led the dividend yield much higher in recent months and today, Newell yields nearly 6%. We define “high yield” as anything with a 5% or greater yield, so Newell fits the bill. We ranked the Best High Dividend Yield Stocks, and Newell landed on the list.
We rate Newell a buy given the combination of growth potential, a deep value price-to-earnings multiple, and a 6% dividend yield.
Business Overview and Recent Events
Newell Brands traces its lineage back to 1903 when Edgar Newell purchased a failing curtain rod manufacturer. In the 116 years since, the company has transformed itself over and over again into a conglomerate of brands that touches a variety of consumer sectors. Newell’s market capitalization today is around $6.6 billion, and it should do over $8 billion in revenue in 2019.
Newell reported Q1 earnings on 5/13/19 and results were strong, leading to a double-digit rally in the share price.
Total revenue was $1.7 billion in Q1, a 5.5% decline against the comparable period last year. Core sales declined 2.4% and the balance of the sales decline was due to foreign exchange headwinds.
Normalized gross margin fell 140bps year-over-year to 31.9% of revenue. The decline was attributed to pricing, productivity, and restructuring cost gains that were more than offset by tariffs, inflation, and forex translation. While we certainly would have preferred that Newell post an improvement in gross margin, the operational items moved in the right direction, while things that are largely out of its control were the only headwinds.
Adjusted operating income rose 180bps to 4.3% of revenue thanks to a reduction in overhead costs. Newell has been busy transforming its business in the past few quarters in part to improve its margin profile. Q1 results would suggest these efforts are paying off, and we find the company’s Q1 performance to be a step in the right direction.
Adjusted earnings-per-share came in at $0.14 in Q1 against $0.28 in the year-ago period. However, results in Q1 are not indicative of the company’s normalized results, as evidenced by very strong guidance, which sent the stock higher on the day of the earnings report.
Newell guided for net sales of $8.2 billion to $8.4 billion, reflecting recent divestitures as well as a core sales decline in the low single digits. Operating cash flow is expected to be $300 million to $500 million, and normalized earnings-per-share should be $1.50 to $1.65. While this level of earnings-per-share represents a sizable decline against 2018’s results, Newell’s transformation is well underway and we believe the stock offers good value today.
Part of the reason why we’re still bullish on Newell despite some near-term bumpiness in the company’s results is its terrific portfolio of brands.
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Source: Investor Presentation, page 10
Newell owns #1 market share in nearly all of its major product categories. This is no accident as the company has worked in the past few years to get away from business-to-business brands and into becoming a consumer-facing conglomerate, owning the highly-recognizable brands shown above.
Another positive impact of this transformation is stronger core sales as well as a more favorable margin profile. This year’s results will be heavily influenced by accounting charges related to assets for sale, taxes, and other non-operational items. However, investors that can look past the noise can pick up a terrific growth story at a very low valuation, and with a high yield to boot.
We conservatively estimate Newell can grow earnings-per-share at 5% annually over the next five years as it gets back on track operationally, as well as the reduced float from its prodigious buyback program. Newell is using the considerable proceeds from recent divestitures to reduce debt and buy back its own shares, boosting earnings-per-share growth via a lower float.
Something For Income Investors As Well
Newell isn’t just a buyback story, however, as its dividend of $0.92 annually is good for a 5.9% current yield. That is near the highest yield the stock has ever had, eclipsed only by the yields seen earlier in 2019 as the stock was making a bottom in the $13s.
We think Newell will continue to grow its dividend at a mid-single digit pace given that its operating cash flows are performing so well and that it continues to reap the benefits of hundreds of millions of dollars of divestitures. However, investors should remember that debt reduction and the buyback are the two priorities for now, so high rates of dividend growth will have to wait.
On the plus side, reducing debt and shrinking the float are both good outcomes for the dividend as the former improves profitability and reduces risk, while the latter makes paying the dividend less costly as fewer shares receive the payout.
Newell Brands’ transformation is well underway, as evidenced by strong guidance following the Q1 report. The company’s portfolio of consumer-facing brands has been carefully constructed for long-term growth, and we think investors that are patient will reap the gains.
Newell trades for less than 10 times this year’s guidance for earnings, whereas we assess fair value at 14 times earnings. This tailwind from the valuation, combined with a high yield and meaningful growth potential has us reiterating our buy recommendation on the stock. Investors that can look past the messiness of 2019’s results will likely be rewarded in the years to come with high dividends and earnings growth.