Newell Brands (NWL) has core brands that include Rubbermaid, Oster, Sunbeam, Mr. Coffee, Ball, Sharpie, Paper Mate, Elmer’s, Yankee Candle, and Coleman, observes dividend expert Ben Reynolds, editor of Sure Dividend.
Newell is in the middle of a major restructuring. The company is selling off under-performing brands that are no longer a part of its future growth strategy. For example, Newell has already sold the Waddington and Rawlings brands, as well as the Goody Products line.
More recently, Newell struck a deal to sell its Pure Fishing and Jostens brands for $2.5 billion of after-tax proceeds. In addition, Newell is currently soliciting bids for the United States Playing Card Co., maker of Bicycle playing cards, which could bring in as much as $200 million.
In early November, Newell reported (11/2/18) third-quarter earnings that showed progress in its key strategic goals, namely deleveraging and share repurchases. Sales fell 7.7% from the same quarter a year ago, influenced primarily by its various divestments. Adjusted earnings-per-share declined 5.8% year-over-year. That said, Newell reduced its debt by $2.5 billion and its share count by 4%.
Along with its third-quarter earnings report, Newell also raised its revenue and earnings estimates for the full year. This is an indication that the turnaround is proceeding better than expected. Once the product portfolio transformation is complete, the company’s new assortment of brands should provide long-term revenue growth and higher profit margins.
We see annual earnings-per-share growth averaging 5.4% for the next five years, composed mainly of margin improvements and share repurchases offsetting lost revenue from divestitures.
Newell Brands has a number of qualities that boost its safety. Its core competitive advantage is its strong brand portfolio. Its brands hold leadership positions across their respective categories, which provides the company with growth potential and pricing power.
It is reasonable to assume many consumers make repeat purchases of Newell products each year. Newell’s dividend payout appears to be secure. The company currently pays an annual dividend of $0.92 per share. Newell’s anticipated payout ratio for 2018 is just 34%, which indicates a sustainable dividend.
Based on expected earnings-per-share of $2.70 for 2018, Newell shares trade for a low price-to-earnings ratio of 7.7. This is well below our fair value estimate, which is a price-to-earnings ratio of 14 for a fair value price of $38 per share.
A price-to-earnings ratio of 14 is a more reasonable valuation for a profitable company with leading brands. Reversion to the fair value estimate over the next 5 years would yield annual returns of 12.7% annually. In addition, the stock has a 4.4% dividend yield, and is expected to produce 5.4% annual earnings growth.
As a result, total returns are expected to exceed 22% annually over the next five years. Newell stock’s combination of yield and deep value makes the company an appealing opportunity for both value and income investors alike.
