Why Newell Looks Good With The 7.49% Dividend Yield

Summary

• Investors sold off Newell after the billion-dollar non-cash write-down.
• Company has enough cash flow to cover the dividend and debt reduction this year.
• Stock's fair value is over $17.00.
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In late March when stocks staged a V-shaped recovery, panic buying nearly any stock would have paid off. Investors could have chosen technology stocks with strong prospects despite the shutdown. This included NXP Semiconductor (NXPI) or Microsoft (MSFT). Venturing into "expensive" stocks like Amazon.com (AMZN) would have rewarded investors even more. Conversely, buying deep value companies that are discounted for good reasons would have paid off.

Almost.

Newell Brands (NWL) looked like a recovery play when the stock bottomed at $10.44. The stock rebounded back to $14 a few times before the quarterly earnings report posted last Friday. But buying the household and personal products firm did not reward buy-and-hold investors. Newell stock fell 11.5% on May 1. What happened last quarter?

Below, Newell's V-shaped recovery proved short-lived:

Mixed First Quarter; Dividend is Safe

Newell reported net sales falling 7.6% to $1.9 billion. Operating cash flow improved from last year by $223 million. The company's massive $1.5 billion non-cash impairment charge caught investors off-guard. This cost Newell $3.02 a share in losses compared to a 36 cents loss last year.

The $476 million in cash and cash equivalents, plus a revolving credit facility with $1.2 billion, gives the company ample liquidity to weather the current crisis. But reducing its leverage will require a combination of cost-cutting, asset sales, and debt reduction.

Newell said it had an interest coverage ratio of 3.5 times and a debt to total cap of 0.6. So long as its capital structure and capital allocation align with managing the crisis stemming from the pandemic, Newell may reduce debt and fund its dividend this year.

Opportunity

Just as investors might bet on oil stocks continuing to pay dividends, they may do the same with Newell. With oil, the sector needs prices rebounding later this year. Similarly, Newell needs the economy to re-start before sales rebound. For example, its Writing unit suffered from the closure of schools, universities, and offices. Its Mexicali Writing facility also closed in the second quarter, worsening the situation.

As countries put together a phased approach in re-opening businesses, schools will re-start, too. The health protection agency needs to have a policy that minimizes a second pandemic when students go back to school.

Newell sees strong data points suggesting sales of appliances and cookware will continue. It said that:

Since mid-March, we have seen 6 straight weeks of sequential improvement in our U.S. Appliances & Cookware POS trends with growth in Mr. Coffee, bread makers, airwaves, heating mats, et cetera, an encouraging trend."

A re-start of factories in China benefits Newell's supply chain. The region is almost back to full capacity. If the company shifts its retail channel focus on e-commerce, it may minimize sales disruptions from here. Last quarter, e-commerce grew in the double-digits. Gross margin rose 110 basis points from last year to 32.8%. The company scores below the industry average on quality:

	Stock	Industry	S&P 500
Quality Score	58	60	80
Gross Margin*	32.80%	38.90%	28.50%
Operating Margin	7.30%	18.90%	13.10%
Net Margin	1.20%	10.90%	9.90%

Click to enlarge

Data Courtesy of Stock Rover and * updated with Newell's Q2/2020

Near term, Newell has 15% of its cost of goods fixed. And two-thirds of its SG&A costs are fixed in the short term, too. Margins should expand in a few quarters as Newell aligns costs to demand levels.

Fair Value

Per simplywall.st, Newell is a healthy company that sells products that customers need. Its dividend yields 7.49% that income investors will receive in 2020.

As its business recovers, so too will its EPS. At a 98.2 cent EPS in 2021, Newell trades at 12.5 times forward earnings.

Source: simplywall.st

Though analysts have a $16.13 average price target, two analysts recently downgraded the stock:

Source: Tipranks

The bullish investor may forecast revenue falling by 6% this year and not growing in the next few years. Assume the following metrics in a 5-year DCF EBITDA Exit model:

Metrics	Range	Conclusion
Discount Rate	7.5% - 6.5%	7.00%
Terminal EBITDA Multiple	9.5x - 11.5x	10.5x
Fair Value	$14.67 - $20.13	$17.34
Upside	19.4% - 63.9%	41.20%

Click to enlarge

Data model courtesy of finbox (Open link to update your fair value estimate).

Assuming Newell's business does not fall, the stock is worth ~$17.00.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NWL over 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.

Comments

[Chris Lau]

Up 43% so far, Newell may return 50-75% next.

[Invest_2020]

Looking at dividend history.....they will for sure to announce dividend cuts very soon.
For dividends to reach last year levels, it could be at least 2 to 3 years.

Total Dividends for the years 2000 to 2007: 0.84
Total Dividends in 2008: 0.84
Total Dividends in 2009: 0.255
Total Dividends in 2010: 0.20
Total Dividends in 2011: 0.29
Total Dividends in 2012: 0.43
Total Dividends in 2013: 0.60
Total Dividends in 2014: 0.66
Total Dividends in 2015: 0.76
Total Dividends in 2016: 0.76
Total Dividends in 2017: 0.88
Total Dividends in 2018: 0.92
Total Dividends in 2019: 0.92
Total Dividends in 2020: 0.23 (so far)

[Mikr]

Their Ball business should be very good this summer given the huge increase in gardening this spring due to COVID. Just a little tidbit I was reminded of today as I read the transcripts of a couple of retailers and all mentioned their gardening business being a bright spot.

[for freedom]

just waiting for the divy anouncement, if they cut it will drop, then I will buy

[Chris Lau]

Getting more interested in buying $NWL soon. The stock is $11.71. Widely held stocks are down today:
$T at 28.94
DIS at 101
BKB down 6%

[stevehodg]

Really the question becomes do you think they can hold the dividend. That is the only question I have keeping me away.

[European investor 99]

DIS still overpriced. NWL/T are both good. Picked up some yesterday at the lows.

[Mikr]

I own the stock and see a lot of upside potential. They have great brands and a management team focused on sales and costs. Their strategy is simple now and easy to understand---stop the sales slide through growth internationally and domestically and continue to cut overhead. 100 basis points combined on cost decreases and sales increases would be huge on their income statement.

The dividend really doesn't matter. If the cut it I don't the price of the stock getting any lower.

I see $25-$30 as the stock price sometime in the next two years.

[European investor 99]

THanks a lot for the article. Bought ina a good amount as they seem to be a good company without major impact with Covid their business should be OK even now. I didnt know the company so researched them based on your article + found a bunch of their products in my own kitchen (many that I ordered recently from amazon). So definitely a good company. Again thanks a lot!

[petro2020]

Don’t forget that they hung onto commercial Rubbermaid. Oil prices and other commodities are going to plummet. In turn, their profit margins should benefit nicely. I like the new team. Wish they sold 1-2 more businesses when multiples were 12x EBITDA, but they should be ok. Would have liked them to cut dividends too, but Icahn will want his cash.

[BrPanthers99]

NWL is my third largest holding. They are significantly improving free cash flow. I wish they paid off even more debt with all the divestures. I would have told you 2 years ago I though the stock would get into the 30’s. Right now I think that is optimistic and in 2-4 years we’re in the mid 20’s. There has been significant insider buying and with their revolver bearly tapped, they have plenty of liquidity

[LPeter]

JP Morgan just downgraded NWL and reduced the target price to $13.
Valens Research issued a report placing NWL on list of high risk for dividend cut.
So I have started following you recently and need to see how a couple of your recommendations do. Thanks

[Willow Street Investments]

@LPeter While I fear the virus will create a dividend cut (as I own shares in the $20s)...those kinds of articles are a coin flip. They are all the rage during economic downturns.

[User 8189701]

i read it then i saw no position nor one in 72 hours..
stock looks like a crap shoot in Vegas in my opinion only

[matratra]

Dividend can be cut & it should be.

[stevehodg]

Huh? Says he may go long

[Chris Lau]

@Esteban2014 the supported diy marketplace guide has 14-20 focus stocks and another 50 on the watch list.

All of these stocks set to triple are* or were stocks I own. Own it at the wrong time and you lose 50%. Buy it at the bottom and you win. I'd say timing is a crap shoot for me :)

* https://bit.ly/2Yion1S