Updated on January 20th, 2023 by Quinn Mohammed
Newell Brands offers a high dividend yield above 6% today, which is nearly four times the yield of the S&P 500 Index. This is an attractive yield for income investors, however Newell Brands stopped increasing its dividend in 2018, but has kept it steady since.
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In this article, we will analyze the consumer brands powerhouse Newell Brands Inc. (NWL).
Business Overview
Newell Brands traces its roots back to 1903, when Edgar Newell purchased a struggling curtain rod manufacturer. Today, Newell Brands is an American global consumer goods company.
The business activities of the group function through five segments, namely, Commercial Solutions, Home Appliances, Home Solutions, Learning & Development, and Outdoor & Recreation.
The learning and Development segment generates most of the revenue for the company, which offers baby gear and infant care products; writing instruments, including markers and highlighters, pens, and pencils; art products; activity-based adhesive and cutting products, and labeling solutions.
Source: Investor Presentation
On October 28th, 2022, Newell Brands reported third quarter results, which came in ahead of expectations. Net sales for the quarter decreased by 19.2% year-over-year to $2.3 billion, partly as a result of the sale of the Connected Home & Security business at the end of Q1 2022. Core sales declined by 10.8% compared to the prior year period. Only one (Commercial Solutions) out of the company’s seven business units saw growing core sales compared to Q3 2021.
The company reported adjusted earnings per share for the quarter equaled $0.53, which was one penny lower than the prior year quarter’s results and beat expectations by $0.06.
Newell ended the quarter with its leverage ratio at 3.9X, up from 3.1X in the same prior year period and 3.0X at the end of 2021.
Newell Brands expects full year net sales of $9.35 to $9.43 billion and $1.56 to $1.61 in earnings-per-share.
Source: Investor Presentation
We expect the company to make $1.60 per share for FY2022. This would represent a 12% year-over-year decrease compared to FY2021.
Growth Prospects
The company has divested many of its lower profit margin brands. This will help the company management team to focus on the core and most important brands, as well as reduce complexity, ultimately driving free cash flow. Following a series of divestitures, Newell’s revenue appears to be stabilizing at about $9 billion to $10 billion annually.
Another growth driver for the company would be to grow its eCommerce. This can be done with a better marketing campaign. This will also help the company to expand internationally, which in turn increases revenue.
The company expected to make operating margin gains in 2022, however this did not materialize. In the first three quarter of fiscal 2022, Newell’s adjusted operating margin was flat at 11.5% year-over-year, but reported operating margin was 7.9%, down from 10.0% in the prior year. Newell expected to increase margins through gross productivity, SKU complexity reduction, pricing/mix, and category management, as well as increasing automation.
Source: Investor Presentation
We forecast no annual EPS growth over the intermediate term, mostly as a result of deteriorating revenue and margins.
Newell Brands itself expects low single digit growth in core sales over the long-term, as well as operating income margin improvements, and a leverage ratio of 2.5x.
Competitive Advantages & Recession Performance
Newell’s competitive advantage is its position in several niche consumer markets that are small but necessary and profitable. Its willingness to buy and sell assets has helped it prepare for future recessions as well, building upon significant earnings growth that occurred during the Great Recession, illustrating the staying power of the model.
The company performed decently during the Great Recession of 2008-2010. However, the stock price saw a decrease of over 80.7% from the high of 2007 to the low in 2009, but earnings did not decrease at that same level.
NWL’s earnings-per-share throughout the Great Recession:
- 2007 earnings-per-share of $1.82
- 2008 earnings-per-share of $1.22 (33% decrease)
- 2009 earnings-per-share of $1.31 (7% increase)
- 2010 earnings-per-share of $1.52 (16% increase)
As you see, the company did not do so terribly during this period. However, the company cut the dividend by 69.6% in 2009 and again in 2010 by 21.5%. This was unfortunate because the company earnings covered the dividend very well during those years.
Dividend Analysis
Newell Brands pays an attractive dividend yield of 6.1%, which is nearly four times higher than the dividend yield of the broader market. However, the company has not increased its dividend since 2018. And we do not expect any dividend increase in the foreseeable future. However, if we look at the dividend payout ratio, the company has room to grow its dividend.
For example, based on the $1.82 per share the company earned in FY2021, the company paid out a dividend of $0.92 per share for the year. This represented a dividend payout ratio of 50.5%. Even during the COVID-19 pandemic, the company’s earnings increased by 5%. The company paid out the same $0.92 per share for the year, a dividend payout ratio of 51.4%.
For FY2022, we expect the company to make $1.60 per share, which will provide a dividend payout ratio of 58%. As you can see, the dividend is well covered, and the company could theoretically provide token increases to the dividend while paying down debt.
The freeze of the dividend at $0.92 per share over the past three years is the result of the company’s focus on reducing leverage.
Given we expect no growth in earnings per share and no growth in dividends per share, the payout ratio should remain as is throughout the period at around 58%, which is only somewhat elevated for the company.
Source: Investor Presentation
The company also has a respectable balance sheet. The company has a debt-to-equity ratio of 1.5X, which is in-line with the company’s 5-year average of 1.4X. The company’s financial leverage ratio is 3.9X, however, which is a fair bit above its target of 2.5X. The company’s long-term debt stood at $4.7 billion as of September 30th, 2022.
Final Thoughts
Overall, Newell Brands is a company in the process of turning it around. The company is doing the right thing by divesting non-core brands and by focusing on reducing its leverage. Because of this, the dividend is safe and should be able to withstand a recession better than it did during the Great Recession. Still, we don’t expect much growth in earnings or the dividend over the intermediate term, as the company works on paying down debt.
In the meantime, the current dividend is attractive, and the company appears to be undervalued at today’s price.
If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:
High-Yield Individual Security Research
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Other Sure Dividend Resources
- Dividend Kings: 50+ years of rising dividends
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- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Monthly Dividend Stocks: Individual securities that pay out every month
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more