Whirlpool Is A Great Dividend Growth Consideration

Summary

• After recent payout increases, Whirlpool Corporation's dividend yield is now much more compelling.
• We view Whirlpool's dividend growth outlook quite favorably, underpinned by its stellar free cash flow generating abilities and promising growth trajectory.
• The consolidation of Whirlpool's global footprint and corporate structure will better enable the firm to pivot towards its bread-and-butter, which is its North American division.
• In our view, Whirlpool is a promising income growth story.

Galeanu Mihai/iStock via Getty Images

By Callum Turcan

We are big fans of home appliance maker Whirlpool Corporation (NYSE:WHR) as an income generation consideration. Recent dividend increases have made its yield much more competitive, and we are big fans of its corporate and global consolidation as that will enable Whirlpool to better focus on its core North American division. Shares of WHR yield a nice ~2.5% as of this writing with ample room for dividend growth going forward. The company's Dividend Cushion ratio, which considers the health of its balance sheet and future expected free cash flow relative to forecasted dividends paid, stands at a healthy 1.8x at the time of this writing.

Image: The Dividend Cushion Ratio Deconstruction reveals the numerator and denominator of Whirlpool's Dividend Cushion ratio. At the core, the larger the numerator, or the healthier a company's balance sheet and future free cash flow generation, relative to the denominator, or a company's cash dividend obligations, the more durable the dividend.

Overview

The Whirlpool brand remains strong in the realm of kitchen and laundry appliances. We view the company's forward-looking dividend coverage quite favorably, supported by its tremendous free cash flow generating abilities (defining free cash flows as net operating cash flows less capital expenditures). The firm aims to spend ~3% of its net revenues on capital expenditures and another ~3% on R&D expenses going forward to stay competitive. When considering potential M&A endeavors, Whirlpool focuses on opportunities that could generate a high return on invested capital ('ROIC').

Image Source: Whirlpool - Second Quarter of 2021 IR Earnings Presentation

The firm's cash flow profile is attractive in large part due to its relatively modest capital expenditure requirements, making free cash flows easier to come by. Whirlpool's long-term goal is to generate free cash flow equal to 6+% of its net sales.

From 2018-2020, Whirlpool's free cash flows averaged ~$0.8 billion per year versus ~$0.3 billion in annual dividend obligations on average during this period. This performance is made even more impressive when considering Whirlpool generated $1.1 billion in free cash flow last year even in the face of substantial headwinds from the coronavirus ('COVID-19') pandemic, while spending $0.3 billion covering its dividend obligations and another $0.1 billon buying back its stock in 2020.

Dividend Growth and Guidance Increases

Whirlpool announced that the firm had approved a 12% sequential increase in its quarterly dividend alongside an additional $2.0 billion in share buyback authorization on April 19. Going forward, we see room for Whirlpool to push through substantial payout increases on the back of its promising growth outlook. The biggest hurdle facing Whirlpool's dividend policy would likely be its net debt load, which stood at $2.3 billion at the end of June 2021 (inclusive of short-term debt). Whirlpool had $3.0 billion in cash and cash equivalents on hand at the end of this period, providing it with ample liquidity.

Over the long haul, Whirlpool aims to keep its leverage ratio at 2.0x or below, defined as gross debt divided by its "ongoing EBITDA" which is an adjusted non-GAAP EBITDA figure over the relevant trailing twelve month period. Additionally, Whirlpool aims to pay out ~30% of its trailing twelve month adjusted earnings in the form of dividends while steadily buying back its stock.

The appliance maker's outlook is incredibly bright. Whirlpool raised its full-year guidance for 2021 during both its first quarter and second quarter earnings reports for this year. Whirlpool now aims to generate ~$1.7 billion in free cash flow, ~16% annual net sales growth, and ~$26.00 in non-GAAP operational EPS in 2021, all of which represent major increases from the full-year guidance given out during the firm's fourth quarter of 2020 earnings update.

Corporate Consolidation

Whirlpool has been actively consolidating its corporate structure and global operations. This strategy involved the firm selling a large equity stake in Whirlpool China to the Chinese firm Galanz through a deal that closed in May 2021. This move raised roughly $0.2 billion in cash proceeds for Whirlpool, which retained a 20% non-controlling stake in Whirlpool China after the deal closed.

Additionally, Whirlpool sold off its Turkish subsidiary through a deal that closed at the end of June 2021 to the Turkish firm Arçelik (OTCPK:ACKAY), which raised approximately $0.1 billion in cash proceeds for Whirlpool. We like the consolidation of Whirlpool's global footprint and corporate structure, as that could generate meaningful cost structure improvements down the road.

North American Strength Continues

Whirlpool's bread-and-butter, its North American division, continues to fire on all cylinders as you can see in the upcoming graphic down below. Simplifying its business model and corporate structure while pivoting towards geographical segments that Whirlpool has a stronger position in, like North America, is a smart decision in our view.

Image Source: Whirlpool - Second Quarter of 2021 IR Earnings Presentation

In the upcoming graphic down below, Whirlpool provides its outlook regarding how it views the home appliance industry progressing through 2021. Please note the strong expected EBIT margins and sales growth in North America.

Image Source: Whirlpool - Second Quarter of 2021 IR Earnings Presentation

Whirlpool embarked on a series of cost cutting measures in 2020 in response to the COVID-19 pandemic (including workforce reductions), though management has noted in the recent past that Whirlpool would face headwinds (at least in the near-term) from higher input prices as raw materials costs (such as steel and resin) are on the rise. With that in mind, better pricing strategies are expected to provide a powerful uplift to Whirlpool's margins going forward, with an eye towards cost based pricing strategies.

During Whirlpool's first quarter 2021 earnings call, management noted that the firm had "announced significant cost based price increase in various countries across the globe ranging from 5% to 12%" in response to various supply chain hurdles. Whirlpool's management team noted during the firm's second quarter 2021 earnings call that pricing increases had a powerful positive effect on the company's recent financial performance, aided by reduced promotional activity and product mix changes as well. The upcoming graphic down below highlights both Whirlpool's near- and long-term goals.

Image Source: Whirlpool - Second Quarter of 2021 IR Earnings Presentation

Over the long haul, Whirlpool aims to generate ~3% annual organic net sales growth which is roughly in line with expected global economic growth during "normal" times. Whirlpool's free cash flow generating abilities should benefit from a combination of expected organic sales growth, various margin-preserving measures (with room for margin expansion upside), and the modest nature of its capital expenditure requirements to maintain a certain level of revenues.

Intrinsic Value Estimate Range

Image: The prices that fall along the yellow line, which includes our fair value estimate, represent a reasonable valuation for the firm, in our opinion. We'd only grow concerned about its valuation if shares were to surpass the high end of the fair value estimate range ($266).

Based on our discounted cash flow model, we think Whirlpool is worth $213 per share with a fair value range of $160.00-$266.00. Shares are trading at ~$225 at the time of this writing. The margin of safety around our fair value estimate is driven by our expectations of the volatility of key valuation drivers and a future assessment of them within the discounted cash-flow construct.

Our near-term operating forecasts, including revenue and earnings, do not differ much from consensus estimates or management guidance. Our model reflects a compound annual revenue growth rate of 3.5% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of -2.9%. We project a 5-year projected average operating margin of 8.3%, which is above Whirlpool's trailing 3-year average.

Beyond year 5, we assume free cash flow will grow at an annual rate of 1.7% for the next 15 years and 3% in perpetuity. For Whirlpool, we use a 9.4% weighted average cost of capital to discount future free cash flows, which is rather conservative.

Image Source: Valuentum

Downside Considerations

With Whirlpool valued about right, we think it's worth noting that there are some risks to this income growth story.

For starters, rising raw materials and other input prices could hurt margins relative to our expectations. Another concern has to do with Whirlpool's net debt load and its other non-cancellable long-term liabilities, such as its pension plan and lease liabilities. However, we view those burdens as manageable given Whirlpool's favorable growth outlook and pricing power. Finally, investors should be aware that Whirlpool's share repurchasing program competes for capital against its dividend obligations.

Despite all of this, Moody's Corporation (MCO) and Fitch both rate Whirlpool's credit rating as investment grade (Baa1/BBB) with a stable outlook. In our view, Whirlpool retains solid access to capital markets and should be able to easily manage its refinancing activities and other needs going forward. This bodes well for continued balance sheet support of the dividend.

Concluding Thoughts

Whirlpool's outlook is incredibly promising, its free cash flow generating abilities are impressive, and we view Whirlpool's forward-looking dividend coverage quite favorably. After its latest dividend increase (announced back in April 2021), Whirlpool's yield is now respectable with ample room for upside via future payout increases. We think the company offers investors a great long-term dividend growth consideration.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Callum Turcan does not own shares in any of the securities mentioned above. Ratings and data as of July 31. For updates, please visit us at www.valuentum.com. This article is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither Valuentum nor any of its affiliates own any securities mentioned in this article. Contact Valuentum for more information about its editorial policies.