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Turnaround Momentum Picks Up for Newell Brands

newell brands

(Piotr Trojanowski/Dreamstime)

By Thursday, 25 July 2019 01:52 PM Current | Bio | Archive

Consumer spending in the U.S. has been somewhat unpredictable in the past few years.

Shifting tastes and preferences have led to certain brands showing outstanding results, while others have languished.

This, despite a rather positive backdrop of economic expansion and wage growth among consumers. Consequently, some stocks in the consumer staples group have languished.

Newell Brands (NWL: NASDAQ) has been on the receiving end of some of these struggles thanks to its wide and deep portfolio of consumer brands, some of which haven’t produced results the company would have liked.

In addition, the company has undertaken a massive restructuring in the past couple of years wherein it has divested billions of dollars’ worth of brands to revamp its offerings.

Unfortunately, investors have thus far been unimpressed, and Newell has fallen 24% in 2019 against a 19% gain for the broader market, as measured by the S&P 500 Index.

However, we continue to like Newell because it is willing and able to return enormous amounts of cash to shareholders via both dividends and share repurchases. In addition, we think the future is brighter for Newell than the current valuation is suggesting, and as a result, it is one of our favorite consumer staples stocks on the market today.

The Turnaround Is Progressing 

Newell is a diversified consumer goods company that has a vast array of consumer-facing brands like Mr. Coffee, Sunbeam, Sharpie, Yankee Candle, Coleman, and many more. The company is a wholesaler of these products and sells them to retailers, who in turn sell them to the public. Newell generates in excess of $8 billion in annual revenue and has a market capitalization of $6 billion.

Newell realized in the past few years that its former portfolio mix of business-facing and consumer-facing brands was inefficient and was simply the result of acquisition and divestiture decisions that were largely made in a vacuum. This disjointed strategy led to poor performance, and the company’s current turnaround plan is addressing these past mistakes.

Newell’s resurgence is dependent upon its ability to generate earnings from its smaller, more focused portfolio of consumer-facing brands, which is a change from its legacy model. We think the company has a bright future in front of it as it has divested non-core brands, generating billions of dollars in proceeds in the process.

The remaining brands have a better growth outlook, including from a margin perspective, so today’s Newell is more attractive than the legacy Newell that had no clear strategy.

The company’s most recent quarter showed much stronger results than expected, which led to a sizable rally in the stock. Revenue came in at $1.7 billion, which was down slightly year-over-year, in part due to a 5.5% headwind from the impact of foreign exchange. Newell thinks it will see a low single digit decline in core sales this year as well.

Newell’s gross margins declined in Q1, but it was due to factors outside of its control, such as tariffs and foreign exchange. Better pricing and productivity helped offset some of these factors, so we see Newell’s margin picture as improving in the near term.

Indeed, operating income was 0.9% of sales in Q1, compared with -1.5% in the same period last year thanks in part to productivity improvements.

Earnings-per-share were cut in half in Q1 on an adjusted basis, falling to $0.14, but management reiterated its guidance for 2019, so we continue to expect $1.60 in earnings-per-share this year.

Capital Returns Remain a Priority

Newell remains and outstanding capital returns story, which is a significant reason why we like the stock. The stock yields 6.5% at present with its $0.92 annualized dividend. That makes Newell a premier income stock, particularly in the current low-rate environment.

Newell’s share count was also 13% lower in Q1 against the year-ago period as the company has put billions of dollars in proceeds to work in lowering the share count. It has also used part of its proceeds to pay down its rather significant debt load, paying down $269 million in Q1.

We see Newell’s combination of a very low valuation, a very high yield, and a comprehensive turnaround play making an attractive stock to own. We think Newell will produce not only strong income for investors for the foreseeable future, but also capital appreciation as well as the share count shrinks and earnings grow over time.

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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We see Newell’s combination of a very low valuation, a very high yield, and a comprehensive turnaround play making an attractive stock to own. We think Newell will produce not only strong income for investors for the foreseeable future, but also capital appreciation.
sunbeam, sharpie, yankee candle, coleman
Thursday, 25 July 2019 01:52 PM
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