The summer heat is on, and nowhere is that more true than in the market these days. After reaching YTD lows in February, the S&P 500 stayed on a generally upward trend until the brief fallout from Brexit at the end of June. Now markets are at all-time record highs right in the heart of earnings season, and stocks at great value are few and far between.
The three names I'm going to discuss here are unfortunately no exception to that trend; all are at or near their 52-week highs and continue trending upward. But given the popularity of their brands, the steady or increasing demands for their products, and their utility to investors as dividend growth plays, these three under-followed companies are worth bearing closer watch if the market begins to weaken.
Whirlpool (NYSE:WHR) is the largest major appliance manufacturer in the world, including its main brand as well as other well-known names like KitchenAid and Maytag. With over a century of business and a global reach spanning Latin America, Europe, the Middle East and Africa (EMEA), and Asia, Whirlpool is unparalleled in its reach and ability to innovate in creating household products.
Whirlpool has reported steadily increasing net sales over the past four years, though as of its latest earnings release on July 22, net sales YTD are down 2.4% YoY. Despite this, operating profit is up 12.7% and the company decided to raise its EPS guidance for the remainder of the year on the basis of a strong first half of the year. Compared to analyst estimates, Whirlpool beat Q2 expectations on both EPS and revenue.
In addition to the strength of the company's business, Whirlpool has also continued to be shareholder-friendly in terms of its dividend. Based on the dividend increase announced in April, Whirlpool's dividend yield of around 2.1% is quickly approaching the S&P 500 average, with accelerating growth based on 3YR, 5YR, and 10YR growth rate averages of 19.9%, 14.9%, and 7.2%, respectively. The company also has a very conservative payout ratio of 31.19%, leaving plenty of room for continued strong increases in coming years.
Though Whirlpool's stock price has run up about 15% over the last month, it still remains over 12% off the all-time high it reached in early 2015 and is still trading a discount of about 14% to an average of its fair value and 1-year target estimates. A slight pullback to $175-$180 would be a nice point to consider Whirlpool.
La-Z-Boy (NYSE:LZB) is a furniture manufacturer and distributor with a strong presence in the competitive North American market thanks to its association with the iconic recliner. Now the company operates in three segments including upholstery, casegoods, and retail, with support to its main brand through portfolio brands like American Drew, Kincaid, and England. From sofas to beds to tables, La-Z-Boy offers a wide variety of furniture to fit the needs of any home.
Over the past five years, La-Z-Boy has seen continued improvements in sales, operating income, and EPS. In its most recent earnings report for Q4 2016 (fiscal year ending April 30), EPS grew 18% and revenue grew 11% YoY. Analysts are currently targeting increase of over 6% and 5%, respectively, in EPS and revenue for the next earnings report in August.
La-Z-Boy is also reinventing itself as a shareholder-friendly company with a strong trend of dividend growth. La-Z-Boy suspended its dividend as a result of the Great Recession and reconstituted it in 2012. Since then, dividends have increased on a compound annual growth rate of 65.1% to their current level of $0.40/share on an annual basis. Though the yield is currently just 1.33%, the clear commitment to increasing shareholder returns and a very low payout ratio of 22.98% make La-Z-Boy an intriguing option for a dividend growth play.
In terms of valuation, La-Z-Boy is nearing its all-time high of $31.22/share set back in early 2014, and is considered fully valued based on an average of its fair value and 1-year target estimates. I don't think La-Z-Boy is a short-term play, but a name to keep an eye on looking forward if it continues to emphasize dividend growth.
Lennox International, Inc.
Lennox (NYSE:LII) is a leading global supplier of HVAC and refrigeration systems with nearly a century of experience. Operating in residential, commercial, and refrigeration business segments, Lennox and its subsidiaries are key players in the U.S. market for climate control products, and also have international manufacturing presence and a retail footprint in Australia and New Zealand.
Since 2011, Lennox has impressively beaten both its peers and the wider market in delivering total shareholder returns. Lennox has delivered increasing net sales each year since 2011, and in its most recent quarterly earnings report posted a record $2.53 in EPS, beating analyst estimates by $0.18. This also spurred the company to raise its EPS guidance for the remainder of the year and reiterate its expectation of revenue growth of 3-7%.
Lennox is also a dividend growth powerhouse. Sustained double-digit 3YR, 5YR, and 10YR CAGR of 22.0%, 18.1%, and 12.9%, respectively, coupled with a payout ratio of 29.37%, demonstrates the upward trajectory of dividend payments. The current yield of 1.08% is rather low, but more reflective of an incredible run up in share price rather than a lack of effort to increase shareholder returns.
Speaking of valuation, the Lennox story is nothing short of incredible in terms of stock price appreciation. Other than minor stumbles here and there, the stock price has steadily increased from $24.37 in late 2011 to its fresh all-time high of $158.97 on the back of its recent earnings release this month. That's a whopping 652% increase in 5 years! This also means that Lennox is currently overvalued compared to the average of its fair value and 1-year target estimates, and trading at an elevated PE of 31. However, given its history over the last five years, Lennox might be worth the premium valuation, though a correction would be helpful for someone evaluating a new position.
Sometimes when it is difficult to find value in a frothy market, it is time to turn one's attention to well-known companies with clear and effective business models and shareholder-friendly dividend strategies for evaluating where gains can be made. Though all three companies mentioned above are above attractive valuation, they are also clearly outperformers and worthy of consideration even at a premium. Ideally, a market pullback to more reasonable levels would be an excellent time to consider these three names, or perhaps just a closer look for future possibilities. Either way, these companies are household names yet still under-followed, and therefore might present more unique opportunities.
I hope you have found this article interesting, and if you'd like to share your own opinions on these stocks please feel free to leave a comment!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.