As a dividend growth investor, I am constantly looking for new income-generating opportunities. Sometimes I add funds to current dividend growth opportunities, and other times I consider starting a new position. New positions make it possible to diversify further and to access new industries and capitalize on additional opportunities.
In these volatile times, investors can see many stocks trading off their all-time highs. One of the most volatile sectors is consumer discretionary. Discretionary products tend to be more inflation sensitive, as consumers are more likely to postpone their purchase as they focus on everyday products. In this article, I will analyze Whirlpool (NYSE: WHR).
I will analyze the company using my dividend growth stock analysis methodology. I use the same method to make it easier to compare searched companies. I will examine the fundamentals, valuation, growth opportunities and risks of the business. I will then try to determine if it is a good investment.
Seeking Alpha’s business overview shows that:
Whirlpool Corporation manufactures and markets home appliances and related products. It operates through four segments: North America, EMEA (Europe, Middle East and Africa), Latin America and Asia. The company’s main products include refrigerators, freezers, laundry appliances, cooking appliances and other small household appliances.
It markets its products under Whirlpool, Maytag, KitchenAid, JennAir, Amana, etc.
The company’s sales have increased by less than 20% over the past decade. This translates to a CAGR (compound annual growth rate) of less than 2%. Whirlpool is struggling to grow despite several acquisitions in the home appliance market. Going forward, analyst consensus, as seen on Seeking Alpha, expects Whirlpool to continue to grow sales at an annual rate of around 1% over the medium term.
EPS (earnings per share) grew at a much faster rate compared to sales. The company more than tripled its EPS despite limited revenue growth. The reasons for the EPS growth are aggressive buyouts, sales growth and cost cutting as the business has become more efficient and has significantly improved margins. Going forward, analyst consensus, as seen on Seeking Alpha, expects Whirlpool to continue to grow EPS at an annual rate of around 2% over the medium term.
The company has paid a consistent dividend for over 30 years. It has steadily increased every year for the past 11 years, with the last increase of 25% in February. The dividend is attractive with a yield approaching 4%. Moreover, the payout ratio is around 20%, which makes the dividend relatively secure, and a cut in the dividend despite the difficult growth is unlikely.
In addition to buybacks, the company is also aggressively buying back its shares. Buyouts are more effective when a company is growing because they supplement EPS growth by reducing the number of shares. Over the past decade, the number of shares outstanding has decreased by 28%. The company intends to continue to buy back its shares and take advantage of its low valuation to make buybacks more efficient.
The P/E (price to earnings) ratio is below 7. A single-digit P/E ratio, given the company’s expected earnings in 2022, is exceptionally cheap. It is also almost the most affordable valuation of the last twelve months. Investors are concerned about medium to short term growth, and the valuation reflects this.
The graph below from Fastgraphs.com also shows how highly valued the company is. Over the past twenty years, the company has traded for 11.5 times earnings on average. However, it has been a relatively bumpy ride for investors as a consumer discretionary company. At the same time, the average growth rate was 7.34%. The expected growth rate is lower, but the valuation is also significantly lower. Investors with a long-term view can benefit from future multiple expansion as inflation declines.
In conclusion, Whirlpool is a company with significant near-term growth challenges. Investors in the company can capitalize on the high dividends and aggressive redemptions offered by the company. While waiting for the company to return to growth, they will capitalize on the extremely low valuation by cashing in their dividends.
Whirlpool has a significant advantage and growth opportunity in its scale. The company is globally diversified and sells on all continents. This allows it to grow in some markets while others lag behind. Latin America, for example, saw single-digit sales growth in the last quarter, while other geographies declined. This means the company can capitalize on opportunities across continents.
Additionally, Whirlpool also has a diverse portfolio of products and a diverse customer base. The company sells to individuals, small businesses and large commercial enterprises requiring special equipment. The company can sell a toaster to a student and a specialized air conditioning unit to offices. Although this means the company is not focused, it can capitalize on more business opportunities.
Whirlpool has also proven to have some pricing power. Although pricing power is limited due to competition, the company has raised prices to fight inflation. In addition, it has a flexible balance sheet. The company has more than $2 billion in cash and cash equivalents, or more than 20% of market capitalization. It also has a low level of debt. These two measures mean that the company can be price competitive in the long run and can also take advantage of depressed prices for M&A activity.
Competition is a major risk for Whirlpool. The home appliance market is very competitive and Whirlpool competes with other giants around the world. The company faces well-known brands like Samsung and Siemens. Competition makes it more difficult to increase market share and prices. This is a long term risk as major competitors also have similar scales and strengths.
Inflation is another risk, and it’s a much more severe risk because of competition. The company faces increasing costs. The cost of labor is increasing, as is the cost of the materials needed to manufacture the products. The company must increase its prices or sacrifice its profitability to maintain its market share. It’s a difficult dilemma in a competitive environment.
Stagnation and short-term execution are also short-term risks. The business cannot grow due to the first two risks, and business stagnation may continue even after the business environment improves. The business will need to be highly efficient and ready to react as the environment stabilizes, initiate future growth prospects and capitalize on opportunities.
In conclusion, Whirlpool is a solid company facing a very difficult business environment. The company faces competition and inflationary pressures that make it difficult to grow sales and EPS. This causes the company’s growth profile to stagnate somewhat, as the fundamentals remain strong and the company pays dividends and buys back its shares.
The company has the necessary assets to pursue its growth. It has a strong balance sheet with low leverage for future investments and acquisitions. It has a diversified portfolio and its global reach will enable it to expand into different markets and product lines. I think the company is attractive enough for income and long-term dividend growth investors at the current valuation.