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Summary

  • The Valuentum Dividend Cushion tool, which is used by financial advisors, is based on a company's future fundamental cash-flow generation and the health of its balance sheet.
  • Under the framework, the safety of Whirlpool's dividend is excellent, as Whirlpool's Dividend Cushion score is 3.7.
  • Whirlpool’s dividend has significant growth potential, and the company is also one of our favorite housing-related ideas.

Valuentum's equity research covers a lot of ground. Not only do we assess fundamental components such as revenue and earnings growth and technical considerations such as relative pricing strength in the 16-page stock reports, but the one-page supplemental dividend reports showcase each firms' dividend yield, strength and track record. In this article, let's assess the prospects of Whirlpool's (NYSE:WHR) dividend.

As a partner for financial advisors, we rely on the weight and depth of our research and analysis, which goes well beyond historical data, to arrive at a pertinent and relevant fundamental free cash flow measure of dividend health, the Valuentum Dividend Cushion. We're one of the few independent companies that provide full financial statements and forecasts of free cash flow of a company long into the future to determine just how safe a cash dividend truly is. In-house research sometimes falls short of deriving cash-flow based coverage metrics.

The Valuentum Dividend Cushion tool, which is used by financial advisors, is based on a company's future fundamental cash-flow generation and the health of its balance sheet, helping avoid the two major factors that cause dividend cuts. The score is forward-looking and meaningful. For example, in the case where one of your dividend-growth holdings has a score of 2, an investor can confidently say the following:

Company XYZ can cover its future cash dividends and embedded growth rate in them (as shown in the dividend report) with traditional free cash flow (cash flow from operations less capital expenditures) and after considering the obligations of its balance sheet by 2 times during the next 5 years.

Financial advisors find this tool quite valuable as a supplement to their in-house research that they perform for their income clients. We've invested a lot of our efforts to help financial advisors avoid that troubling message. The Valuentum Dividend Cushion score can easily be compared to those of other firms (as shown below) -- it offers a safety ranking system, to a degree. In finding a great dividend growth stock for their income clients, we help advisors look for firms that have an excellent combination of a high dividend yield and a Valuentum Dividend Cushion score comfortably above 1 (preferably above 1.25). The beauty about the assessment is that it is completely independent--you don't have to deal with others talking their books, for example.

With that said, let's get started in the assessment. First, please take a look at the one-page tear sheet above. It addresses dividend safety, dividend growth, and a firm's dividend track record. What a handout to give to your clients. Under the framework, the safety of Whirlpool's dividend is excellent (please see the rating in the report above), as Whirlpool's Dividend Cushion score is 3.7. This indicates to us that the company can essentially triple its dividend before we would even start growing concerned about its safety.

Now on to the potential growth of Whirlpool's dividend. As we mentioned above, we think the larger the "cushion" the larger capacity a company has to raise the dividend. Such dividend growth analysis is not complete, however, until after considering management's willingness to increase the dividend. Capacity and willingness are two key concepts for dividend growth to materialize -- you can't have one without the other. We evaluate the company's historical dividend track record. If there have been no dividend cuts in many years, the company has a nice growth rate, and a nice dividend cushion, its future potential dividend growth would be excellent, which is the case for Whirlpool.

All things considered, Whirlpool's dividend has significant growth potential, and the company is also one of our favorite housing-related ideas. Whirlpool possesses tremendous operating leverage, so small increases in sales have a large impact on the bottom line. This aspect of its business model coupled with improving operational performance makes us confident that the appliance pure-play has room to the upside. For one, US T7 (washers, dryers, refrigerators, etc.) still have quite a way to return to normalized demand levels, implying significant earnings and cash-flow upside at the company. The high end of our fair value range for Whirlpool is over $200 per share, and we would not be surprised to see the company breach those levels if our views on its operating leverage prove true. Our best ideas are always included in the Best Ideas portfolio and Dividend Growth portfolio.

Source: Whirlpool: A Hidden Housing Play With Tremendous Operating Leverage