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Whirlpool: High Total Returns Expected Ahead

whirlpool logo in dark print on white tablet screen
(Mohamed Ahmed Soliman | Dreamstime)

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Friday, 26 October 2018 04:11 PM Current | Bio | Archive

Investing in high-quality companies with strong brands, competitive advantages, and growth potential, is a proven strategy to generate high returns over time.

The first place to look for quality dividend stocks is the S&P 500 Index, the most widely-known U.S. stock market index. The S&P 500 Index contains the 500 largest companies by market capitalization (that also meet other criteria). As a result, the S&P 500 is a fantastic place to look for dividend stock opportunities.

When it comes to brand power, competitive advantages, and growth potential, Whirlpool Corporation (WHR) checks all the boxes. The stock has declined approximately 38% since the start of 2018, due to fears of a housing market downturn, and the impact of tariffs and trade wars.

However, this might be a great buying opportunity for investors. Whirlpool continues to report strong earnings. The share price decline this year has elevated its dividend yield to an attractive 4.4%, and the stock appears to be significantly undervalued right now.

A Perfect Storm

Whirlpool generates approximately $21 billion in annual sales. It has a large portfolio of category-leading brands, such as Whirlpool, KitchenAid, Maytag, Consul, Brastemp, Amana, Bauknecht, Jenn-Air, and Indesit. As a global manufacturer of household appliances, Whirlpool has been caught up in the escalating trade concerns between the U.S. and other nations such as China. Furthermore, inflation has reared its ugly head this year, which has increased the company’s raw materials costs.

Finally, Whirlpool is reliant on a healthy housing market for growth. Rising interest rates could negatively impact the U.S. housing market, which in turn could impact appliance sales. All of these forces have combined and eroded investor sentiment, which explains the steep decline in Whirlpool’s share price to start 2018.

Despite the various headline risks, fundamentally Whirlpool continues to perform well. Whirlpool reported its third quarter earnings results on October 25. Organic revenue (excluding the impact of currency fluctuations) increased 1.5% for the quarter. Whirlpool also reported 19% growth in adjusted earnings-per-share last quarter, due to organic revenue growth, share repurchases, and the benefit of tax reform.

In addition, the company raised its earnings guidance for the rest of the year. Whirlpool now expects adjusted earnings-per-share of $14.50 to $14.80, versus prior guidance of $14.20 to $14.80 per share. Compared with 2017 earnings-per-share of $13.74, Whirlpool expects earnings growth of 5.5% to 7.7% this year. From this perspective, 2018 is expected to be another successful year for the company, which means the huge share price decline could be a great buying opportunity.

Strong Brands, Competitive Advantages Fuel Growth

Whirlpool is a global manufacturer, with 70 manufacturing and technology research centers. In fact, Whirlpool is the leading manufacturer in seven out of the ten largest countries in the world, which gives the company a cost advantage, and also allows it to invest in research and development to innovate new products. For example, Whirlpool launched more than 100 products in 2017 alone, which will help it maintain its brand leadership. Its global R&D and manufacturing presence also gives the company exposure to high-growth emerging markets such as China and India going forward. Whirlpool is expected to grow future earnings at a ~9% annual rate over the next five years.

Attractive Return Potential

In addition to earnings growth, Whirlpool’s dividends and a rising stock valuation will contribute to shareholder returns going forward. Whirlpool currently pays an annual dividend of $4.60 per share, which results in a dividend yield of 4.4%. This is more than double the average dividend yield of the S&P 500 Index right now. Moreover, Whirlpool stock appears to be significantly undervalued, especially since the company continues to grow earnings. Based on 2018 guidance, Whirlpool stock trades for a price-to-earnings ratio of 7.2, a valuation that is far too low, given Whirlpool’s brand power, competitive advantages, and growth potential.

Fair value for Whirlpool should be a price-to-earnings ratio of at least 11.5. If the stock valuation rises to the fair value estimate, annual returns would be increased by approximately 9.8% per year over the next five years.

Putting it all together, the positive impacts of earnings growth, dividends, and valuation changes, result in total expected returns of 23.2% per year. Put simply, Whirlpool’s severe share price decline this year seems unwarranted. However, the steep drop throughout 2018 is a welcome buying opportunity for 20%+ annual returns over the next five years.

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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BenReynolds
Whirlpool stock has declined approximately 38% since the start of 2018, due to fears of a housing market downturn, and the impact of tariffs and trade wars.
whirlpool, high, total, returns
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2018-11-26
Friday, 26 October 2018 04:11 PM
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