A Look At Hanesbrands Inc.'s Fat 5.1% Yield

Jun. 02, 2022 3:36 PM ETHanesbrands Inc. (HBI)SDEI, WBIY, MGMT, TWIO, AILV, DIVA, UVDV, ERM, CVAR, DVY, FXD, USVT, JHMC, PAMC75 Comments16 Likes
Leo Nelissen profile picture
Leo Nelissen
16.18K Followers

Summary

  • In this article, I give you my opinion on one of the highest yields in the consumer sector, Hanesbrands' 5.1% yield.
  • The company is the ultimate value stock due to very low growth, but very high cash generation used to service Hanesbrands' high dividend yield and reduce debt.
  • HBI shares are undervalued due to economic headwinds, which opens up opportunities for bargain hunters.

Münze Stapel mit Buchstaben Würfel-Vorfahrt

Zerbor/iStock via Getty Images

Introduction

We're doing things a bit differently in this article. For the first time in a while, I'm going to discuss a high-yield stock. In the past few months, we have covered a lot of lower-yield dividend growth companies and some "high-yield" stocks that a lot of readers believed were far from high-yield. The problem is that dividend yields, in general, are very low. This turns a 3% into a high-ish-yield stock.

In this article, we will discuss Hanesbrands Inc. (NYSE:HBI), which combines two things that pull me out of my comfort zone: consumer apparel and a (very) high yield. I will share my thoughts on how I would deal with this company, as it offers two things investors can use to their advantage: high income, and undervalued equity. So, bear with me!

A Yield That's Actually High

This North Carolina-based apparel manufacturing giant is currently paying a $0.15 dividend per share per quarter. That translates to $0.60 per year and a 5.1% yield using the current share price.

This yield is one of the highest in the company's relatively short dividend history. If we ignore the panic sell-off in 2020, it is the highest yield. It's almost unnecessary to say, but we're dealing with a very high yield here - especially on a relative basis. The Vanguard High Dividend Yield ETF (VYM), which I like to use as a benchmark, is yielding just 2.8%. That's why even a 3% can be considered to be a high yield in this market - and isn't that just a bit depressing for people dependent on income from dividends?

Chart
Data by YCharts

In the case of Hanesbrands, we're dealing with a stock that I would put entirely in the "value" category. In this case, I define value as a company's ability to generate (a lot of) cash on a regular basis without high (expected) growth rates. These companies are often large, very mature, and operating from a very large footprint in a certain industry. For example, I would put a company like Coca-Cola (KO) in the same category.

In the case of Hanesbrands, dividend growth was steep between 2013 (initiation) and 2017. Since then, the dividend has peaked.

HBI dividends

TIKR.com

An unchanged dividend isn't the worst thing in the world. After all, we're currently dealing with a >5% yield. Moreover, it's another characteristic of a value stock. It's also the reason that, compared to the consumer discretionary sector, the company has just one high grade: its yield. It scores a big fat F in all other categories, including growth and safety.

HBI dividend grades

Seeking Alpha

Let me elaborate on that.

Hanesbrands, A Value Stock

Scoring an F on dividend safety, dividend growth, and consistency is something that should scare everyone away from owning HBI. However, it's not that bad.

As I already said, Hanesbrands is the ultimate value stock. With a market cap of $4.13 billion, it's one of the world's largest apparel-focused companies. It generates 70% of its sales in the United States. The most important thing that this company brings to the table in the industry is diversification. I am not a fan of apparel, in general, for one major reason: competition. Fashion trends shift, competition is fierce, and retailers are prone to so many factors including but not limited to consumer confidence, weather, and inflation. Hanesbrands does not have stores. It produces apparel, which it sells to distributors under various brand names - including licensed brands like Polo Ralph Lauren.

17% of total sales are direct-to-customer sales via company-owned websites.

HBI brand overview

Hanesbrands (2021 10-K)

The company's brands like Champion are high-quality products that appeal to a lot of people given their affordable pricing point.

The good news is that the company makes a lot of money selling its products (value). The bad news is that there's no uptrend (no growth). In a "normal" economic year, the company is doing roughly $1.0 billion in EBITDA and $600 million in free cash flow. In 2020, numbers were slower as stores were closed due to the pandemic. The same goes for 2022, except that in this case, pressure comes from consumer weakness and (mainly) supply issues that are doing damage.

Free cash flow, EBITDA

TIKR.com

The good news is that because of the average price of Hanesbrands products, it's not impacted as much as more expensive brands. According to the CEO, it's mainly supply issues that keep the company from flourishing:

CEO Steve Bratspies stated that demand for the company's products continues to be strong into the second quarter as consumer strength proves resilient. However, he added that the company is seriously challenged by both supply chain and inflationary impacts that curtail its ability to capitalize upon that demand.

Moreover:

“The global operating environment has deteriorated significantly over the past three months, with accelerating inflation, continued COVID-19 disruptions and logistical challenges,” Bratspies lamented. “In this environment, we are highly focused on executing in the areas we control.”

Unfortunately, the trend of these impacts stands largely out of management’s direct control. For example, the company reported leaving $40 million of in-hand orders in the U.S. unfulfilled due to a lack of inventory. While Bratspies indicated the company is making diligent efforts to shore up inventory, significant shipping delays are beyond the scope of company control.

The biggest risk is that consumer weakness will eventually add to these problems, hurting both the company's supply and demand. After all, consumer confidence is in free fall, as customers have a hard time dealing with energy and food inflation, pressuring the sale of discretionary items.

Michigan consumer confidence

University of Michigan

While I will come back to this when talking about valuation, I don't care too much about growth. The best way to think of Hanesbrands is as a company able to generate high free cash flow, and used to distribute cash to shareholders. That's how I think of my energy stocks as well.

If we assume that the company can do $600 million in free cash flow in "normal" years with an upside to $700 million in good years, we're dealing with an implied free cash flow yield of 14.5% to 16.9%, which is truly remarkable. Free cash flow is operating cash flow minus capital expenditures, which means it's the cash flow a company can distribute without having to access external funding or its existing cash position. In other words, the company could pay a 14.5% dividend (yield) in normal years.

However, bear in mind that this is only an example of what the company is capable of. There is no way the company spends 100% of its free cash flow on dividends. My main point is that there is room to grow the dividend and that dividend safety is higher than the dividend grades table in this article suggests.

Also, note that free cash flow doesn't mean a lot when debt is unsustainable. Companies with a lot of debt often prioritize debt reduction before paying or hiking their dividend. Hanesbrands, however, has consistently declining net debt (gross debt minus cash). Next year, the company is expected to lower net debt to $2.6 billion, or 2.5x EBITDA. That's sustainable. Even in 2020, the net leverage ratio did not rise above 3.3x despite much lower EBITDA.

HBI net debt

TIKR.com

It also helps that the company's valuation is attractive, which we will discuss next.

Valuation

In order for a "value" stock to make sense, it needs to trade at an attractive price. Hanesbrands has a $4.13 billion market cap. Next year, net debt is expected to fall to $2.6 billion. I'm using that number as free cash flow is almost certainly leading to lower net debt - unless something truly devastating happens to the global economy. The company also has close to $240 million in pension-related liabilities. Adding all of these numbers gives us an enterprise value of $7.0 billion.

As next year's EBITDA is expected to be $1.0 billion - in line with its "average" EBITDA in normal years - we end up with a 7.0x valuation multiple. That's close to the lower bound of the long-term valuation multiple.

Chart
Data by YCharts

The same goes for the free cash flow yield. The implied normalized yield of 14.5% is close to the higher bound of the historic range.

As I said, it's very important to only buy value stocks at a good valuation. After all, Hanesbrands hasn't been the easiest investment investors could have made. Since pre-Great Financial Crisis times, Hanesbrands has returned 142% excluding dividends and 213% on a total return basis. The S&P 500 has returned roughly 340% including dividends. That's a big gap.

Chart
Data by YCharts

The stock did incredibly well when the consumer gained strength in 2012, but lost momentum in 2015. Competition is fierce, growth has flattened, and the market offers a lot of other places to put money.

This brings me to my takeaway.

Takeaway

Hanesbrands is once again in a tough spot. The company is down 30% year to date as a result of consumer weakness and supply chain issues. This adds to the pain investors have suffered as the stock has returned just 213% since the early 2000s, including dividends.

The dividend scorecard isn't pretty, either. HBI can only score high on its yield, which is 5.1%, which makes it very juicy in this market. While the company has very slow long-term growth, I disagree with low dividend safety. The company is generating strong free cash flow, resulting in a double-digit free cash flow yield. It has a healthy balance sheet and a business model that gives it safety in a very competitive industry.

Personally, I'm not looking to buy Hanesbrands. That's based on my focus on dividend growth. However, Hanesbrands isn't a bad stock, it just caters to a very specific category of investors.

Hanesbrands is very attractively valued. I believe the stock should trade at $16, if not more. However, getting there is an issue. The market is nervous, and it may take a while until we see a solid recovery. This is why I give the stock a neutral rating for now, solely based on the macroeconomic environment.

Buy Hanesbrands if you are looking for a high and safe yield. The company is undervalued, and it will without a doubt be one of the biggest winners if supply chain issues fade. However, I'm not sure how much long-term capital gains this company can offer due to the low-growth nature of its business.

So, please keep this in mind when assessing whether HBI is a stock you want to buy. The value combination of high yield and undervalued equity is great, but it may lack long-term upside.

(Dis)agree? Let me know in the comments!

This article was written by

Leo Nelissen profile picture
16.18K Followers
I'm a Buy-Side Macro Expert/Financial Markets Analyst. On Seeking Alpha, I discuss a wide range of topics including long-term dividend (growth) investments, mid-term trading opportunities, commodities, rates, and related. My DMs are always open. Also, I'm on Twitter (@Growth_Value_) in case you want to say hi! Long-Term Dividend HoldingsPSA, DUK, HD, PEP, RTX, UNP, VLO, DE, ABBV, CAT, HBAN, NSC, LHX, XOM, HII, AAPL, XEL, CVX, CP, LMT, NOC, NDAQ, CME, DHR
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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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

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