Hanesbrands: Turnaround Income Play With Possible Dividend Increase In January

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About: Hanesbrands Inc. (HBI), Includes: BA, DLR, HD, HOG, JNJ, LB, MMM, MO, OHI
by: William Stamm
Summary

Hanesbrands' total return over-performed the DOW average for my 58.0 month test period by a great 51.93%.

Hanesbrands has increased its dividend for the past 5 years and presently has a yield of 3.0% which is above average.

Hanesbrands' three-year forward CAGR of 16% is good and will give you good growth with the increasing revenue added due to buying bolt-on companies.

This article is about Hanesbrands (HBI) and why it's a buy for the income investor and total return investor long term. Hanesbrands is a manufacturer of innerwear and active-wear apparel worldwide under apparel brands, such as Hanes, Champion, Maidenform, and many others.

Hanesbrands is being reviewed as a possibility buy for The Good Business Portfolio. HBI has had good times and has been slow the last 3 years and this may be the turning point for the company as they continue to grow by buying bolt on companies and expand in foreign countries.

When I scanned the five-year chart, Hanesbrands has a fair chart going up and to the right in a steady, strong slope in 2013 and 2014, then it hit a 3 year period of slow decrease in price. In 2013 HBI had a good year when the market was up 27%, HBI came in at a 95% increase.

Chart HBI data by YCharts

Fundamentals of Hanesbrands will be reviewed in the following topics below:

  • The Good Business Portfolio Guidelines
  • Total Return And Yearly Dividend
  • Last Quarter's Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Hanesbrands passes 10 of 11 Good Business Portfolio Guideline, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

  1. Hanesbrands does not meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, with 5 years of increasing dividends and a 3.0% yield. Hanesbrands is therefore a fair choice for the dividend income investor looking over the last 5 years. The recent payout ratio is low at 30%. After paying the dividend, this leaves plenty of cash remaining for investment in expanding the business by buying bolt-on companies and increasing the dividend.
  2. I have a capitalization guideline where the capitalization must be greater than $7 Billion. HBI passes this guideline by a small amount. HBI is a mid-cap company with a capitalization of $8.0 Billion. Hanesbrands 2017 projected cash flow at $606 Million is good, allowing the company to have the means for company growth and increased dividends.
  3. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.1%. The one-year forward CAGR of 16.0% easily meets my guideline requirement. This good future growth for Hanesbrands can continue its uptrend benefiting from the continued growth of the United States and foreign economies.
  4. My total return guideline is that total return must be greater than the Dow's total return over my test period. HBI passes this guideline since the total return is 131.58%, more than the Dow's total return of 79.65%. Looking back five years, $10,000 invested five years ago would now be worth over $29,338 today. The total return in the good year of 2013 was 95.8% compared to the DOW gain of 27%, a big beat. This makes Hanesbrands a good investment for the total return investor looking back, that has future growth as the economy continues to grow. As a added plus we have President Trump cutting corporate taxes (both domestic and foreign) which will increase earnings.
  5. One of my guidelines is that the S&P rating must be three stars or better. HBI's S&P CFRA rating is four stars or buy with a recent increased target price to $27.0, passing the guideline. HBI 's price is presently 42% below the target. HBI is under the target price at present and has a low PE of 11.6, making HBI a good buy at this entry point if you are a investor who wants income with an above average dividend yield and total return.
  6. One of my guidelines is whether I would buy the whole company if I could. The answer is yes. The total return is strong, and an above average yield makes HBI a good business to own for income and growth long term. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes HBI interesting is the potential long-term growth as the economy grows and you have income for the income investor while you wait.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Hanesbrands beats the Dow baseline in my 58.0-month test compared to the Dow average. I chose the 58.0-month test period (starting January 1, 2013, and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The great total return of 131.58% makes Hanesbrands a good investment for the total return investor that also wants a steady increasing income. HBI has an above average dividend yield of 3.0% and has had increases for the past five years making HBI also a good choice for the dividend income investor. The dividend is estimated to be increased in January 2018 to $0.18/Qtr. from $0.15 or a 20% increase.

DOW's 58.0 month total return baseline is 79.65%

Company Name

58.0 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Hanesbrands

+131.58%

+51.93%

3.0%

Last Quarter's Earnings

For the last quarter on November 1, 2017, Hanesbrands reported earnings that were in line with expected at $0.60 and compared to last year at $0.45. Total revenue was higher at $1.8 Billion more than a year ago by 2.3% year over year and was in line with expected revenue. This was a good report with bottom line in line with expected and the top line is increasing and having a good increase compared with last year. The next earnings report will be out in late January 2018 and is expected to be $0.53 compared to last year at $0.41.

Business Overview

Hanesbrands is a manufacturer of innerwear and active-wear apparel worldwide and in the United States.

As per Reuters:

Hanesbrands is a marketer of basic innerwear and active-wear apparel in the Americas, Europe, Australia and Asia/Pacific under apparel brands, such as Hanes, Champion, Maidenform, DIM, Bali, Playtex, Bonds, JMS/Just My Size, Nur Die/Nur Der, L'eggs, Lovable, Wonderbra, Flexees, Gear for Sports and Berlei. The Company operates through four segments: Innerwear, Active-wear, Direct to Consumer and International. The Innerwear segment focuses on core apparel products, such as intimate apparel, men's underwear, women's panties, children's underwear, socks and hosiery. The Company operates in the active wear market through its Champion, Hanes and JMS/Just My Size brands. The Direct to Consumer segment operations include its domestic Company-operated outlet stores and Website operations that sell its branded products directly to consumers in the United States. The International segment includes products that primarily span across the innerwear and active-wear segments. "

Overall Hanesbrands is a good business with 16% CAGR projected growth as the worldwide economy grows going forward. The good earnings and revenue growth provides HBI the capability to continue its growth by increasing revenue as they buy bolt-on companies and increase dividends.

Also as a tailwind, we have President Trump wanting to lower corporate taxes on income. As the corporation tax rate is lowered earnings of Hanesbrands business income should increase.

The economy is showing moderate economic growth right now (about 2.9%), and the FED has raised rates in June 2017, with future rate increases dependent on the United States economy and inflation. The FED projects for one more increase in 2017. I feel the Fed is going slowly; they don't want to trigger a slowdown in the economy.

From November 1, 2017, earnings call Gerald W. Evans Jr. (Chief Executive Officer) said:

Hanesbrands delivered a solid third quarter performance with revenue and earnings per share right in line with our guidance and cash flow from operations year-to-date $120 million ahead of last year. While the quarter came together a little differently than we expected, the end result was that we delivered on our guidance, we returned to organic growth and we generated a significant amount of cash flow. Our business model has become increasingly diversified as it offers multiple paths for delivering growth and long-term shareholder returns, even with the challenges of the U.S. market. In fact, we saw three key points in the quarter that demonstrate our diversified model is working

First, we continue to generate greater amounts of cash flow. We are recognizing synergies from acquisitions, the associated integration expenses are declining, we are improving our working capital and Project Booster is ramping on schedule. All of this gives us confidence in our ability to deliver at least the midpoint of our cash flow guidance for the year and on our goal of a $1 billion run rate as we exit 2019.

This shows the feelings of top management to continued growth of the Hanesbrands business and shareholder return with action being taken to increase future cash flow growth. This shows that HBI is growing again like it did in 2013-2014 with a good economy.

The graphic below shows that Hanesbrands is a good corporate business around the world and they cherish achievements and a strong reputation for corporate citizenship and social responsibility.

Source : Hanesbrands web site

Takeaways

Hanesbrands is a good investment choice for the income investor with its above average yield and a great choice for the total return investor long term. Hanesbrands will definitely be considered for The Good Business Portfolio when an open slot is available and also will be compared to L Brands (LB), a competitor already in the portfolio. If you want a growing income and good total return growth. HBI may be the right investment for you.

Recent Portfolio Changes

  • Increased the position of Omega Healthcare Investors ( OHI) to 6.0% of the portfolio. I wanted a little more income and to take advantage of the recent dip in price.
  • Recently on October 16 trimmed Boeing ( BA) from 11.3% of the portfolio to 11.0%. A great company, but you have to be diversified. The Paris Air Show was great for Boeing, and they easily beat Airbus in orders by a mile.
  • Wrote some LB November 17, strike 42.5 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
  • Increased the position of L Brands (LB) to 3.2% of the portfolio, I believe the downturn in LB is well overdone.
  • Increased position of GE to 4% of the portfolio, a full position. GE has now become a value and income play.
  • Sold Harley Davidson (HOG) position from the portfolio and will watch to see if President Trump cuts corporate taxes or brings foreign profits back at a low tax rate. This sell gets rid of an underperformer and makes room for a company with more present growth.
  • Added a starter position of 3M (MMM) at 0.5% of the portfolio. They have a good steady dividend history, a dividend king with 58 years of increasing dividends and great total return. Please see my article on 3M, " 3M: Dividend King With Great Total Return."

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (JNJ) is 8.8% of the portfolio, Altria Group (MO) is 6.8% of the portfolio, Home Depot (HD) is 8.6% of portfolio and Boeing is 11.3% of the portfolio, therefore BA, JNJ, and home Depot are now in trim position with Altria getting close.

Boeing is going to be pressed to 11% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The second quarter earnings were fantastic, with Boeing beating the estimate by $0.25 at $2.55. The third quarter earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% year over year another good report. Recently S&P Capital IQ raised its one-year target to $272.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did like the growth going forward. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 2nd Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after the earnings season is over in a couple of weeks.

I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, Omega Health Investors, Digital Investors Trust (DLR) and Home Depot (HD) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them in my list of previous articles.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM. 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.