Turnaround stocks can be classified as companies undergoing changes because the underlying business is not performing up to expectations. A company experiencing a turnaround typically sees its share price decline, due to investor uncertainty and falling earnings.
Newell Brands (NWL) investors have experienced this first-hand over the past year. Shares of Newell Brands have lost nearly half their value so far in 2018, as the company grapples with slowing sales across certain product lines.
But the good news is, turnarounds usually give investors an opportunity to buy shares at a measurable discount. This means, if the turnaround proves successful, investors could earn high total returns through a rising share price, and a high dividend yield.
Newell Brands has a strong and diverse brand portfolio, and due to the year-to-date share price decline, the stock is undervalued with a 6% dividend yield.
Strategic Turnaround Underway
Newell Brands is a consumer products company. It owns a number of category-leading brands that investors are probably very familiar with. Some of its core brands include Rubbermaid, Oster, Sunbeam, Mr. Coffee, Ball, Sharpie, Paper Mate, Elmer’s, Yankee Candle, and Coleman.
At the same time, consumer goods companies can sometimes become bloated with under-performing brands spread out across too many different product categories. This was the case for Newell, which has experienced slowing sales over the course of the year. Sales declined 6% in the most recent quarter, due partly to the closure of Toys ‘R’ Us. Not only that, but Newell Brands became disappointed with the performance of a few categories such as writing, baby, and outdoor products.
In response, Newell Brands expects to sell eight brands in a variety of product categories. The reason for this is that a few of the company’s product lines are no longer growing at the same rate they used to. Newell Brands has already sold the Waddington and Rawlings brands, and further divestments are expected to follow.
In August, Newell sold its Goody Products line to ACON Investments. In addition, Newell is currently taking bids for the United States Playing Card Co., maker of Bicycle playing cards, which could bring in as much as $200 million.
It is easy to see why Icahn is bullish on the company. Newell still has a large portfolio of strong brands. Selling off non-performing product categories will help streamline the company’s operations to become more efficient. With a leaner brand portfolio focusing on the most promising opportunities, Newell could return to growth in 2019 and beyond. And, the funds raised from asset sales can be used to pay down debt and buy back stock.
This 6% Yield Beats The Bank
Investing in turnaround stocks carries risk. There is always a chance that the turnaround will not succeed. This is why having one of the most widely-known investors in the world on board can help instill confidence among Newell’s shareholders. Carl Icahn, noted activist investor, owns 8.1% of Newell Brands shares. Presumably, Icahn is highly confident that the turnaround will greatly improve the company’s long-term prospects.
In the meantime, investors have the opportunity to buy shares of Newell at a low stock valuation, and with a high dividend yield. Newell shares currently trade for a price-to-earnings ratio of just 6.2, based on expected earnings-per-share of $2.50 for 2018. The stock trades at a significant discount to fair value, which should be a price-to-earnings ratio of 14. A rising stock valuation alone could generate annual returns of 18%.
Plus, Newell is expected to grow earnings by 5% per year over the next five years, which will add to shareholder returns. Lastly, Newell stock pays a 6% dividend yield, which makes it very attractive for income investors. In an environment of low interest rates, in which yields remain very low, Newell stock pays a high dividend yield that is better than investors can get from most alternatives.
The combination of valuation changes, earnings growth, and dividends could provide annual returns of roughly 29% per year over the next five years. The stock has been beaten down to start 2018, but for investors willing to take the risk, Newell could be an excellent buy-low stock.
(Disclosure: I am long NWL.)
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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