HBI dividend cut

HanesBrands (HBI) Dividend Cut to Zero

HanesBrands was a popular dividend stock because of its elevated dividend yield. Additionally, some investors view undergarments as a basic necessity and, thus, a consumer staple, making the dividend secure. But, the dividend yield had reached ~10%, a value often indicating a distressed company. Next, inflation has caused costs to rise and consumers to pull back. Also, clothing purchases can be pushed off a few months if needed. In addition, HanesBrands has high leverage. The effect was an unsustainable dividend. Hence, HanesBrands (HBI) eliminated the dividend, cutting it to zero and redirected cash flow to debt reduction.


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Overview of HanesBrands (HBI)

HanesBrands traces its history back to 1901, founded in Winston-Salem, North Carolina. In 2006, it was spun off from Sara Lee Corporation. Since then, the company has grown through many acquisitions.

Today, the company is one of the leading clothing manufacturers in the United States. Hanes sells T-shirts, socks, underwear, activewear, etc. It operates in three segments: Innerwear, Activewear, and Intimate Apparel.

The firm’s leading brands are well-known to American consumers. They are Hanes, Champion, Maidenform, Bali, Playtex, Just My Size, WonderBra, Bonds, and bra N Things. HanesBrands also sells clothing under other brand names. The company sells the brands globally through retailers and wholesalers.

Total revenue was $6,233.65 million in 2022 and the past twelve months.

Dividend Cut Announcement

HanesBrands eliminated its dividend entirely on February 2, 2023. The company’s quarterly dividend has been $0.15 per share since early 2017. Specifically, HBI’s CEO, Steve Bratspies, stated,

“We delivered fourth-quarter results at or above our guidance as we continue to take actions to navigate the extremely challenging environment. HanesBrands is a stronger, more disciplined company than we were even a year ago, and we’re not standing still. We have created a clear path to improving cash flow and margins as the year progresses. We shifted our capital allocation strategy, eliminating the dividend as we commit to reducing debt. We remain confident in our Full Potential plan and in achieving our long-term financial targets.”

In response to the announcement, the stock price plummeted.

The company is focusing free cash flow (FCF) on accelerating debt reduction. The objective is to strengthen the balance sheet and increase financial flexibility.

Challenges

HanesBrands’ main issue is high leverage and rising interest rates combined with lower earnings before interest, taxes, depreciation, and amortization (EBITDA). Interest rates are rising because of the U.S. Federal Reserve’s objective to withdraw liquidity from the bond market and raise the Federal Funds rate to counter high inflation.

Debt and Leverage

Debt and leverage are a problem for HanesBrands. At the end of 2022, the company had $238.4 million in cash, short-term debt of $209.5 million, current long-term debt of $37.5 million, and long-term debt of $3,612.1 million. To put this in perspective HanesBrands has a market capitalization of about $2 billion, and thus net debt far exceeds it.

These numbers result in a leverage ratio of ~4.3X and interest coverage of only around 3.7X. Most companies like maintaining a leverage ratio between 2X and 3X and higher interest coverage.

Although the company has not added to total debt significantly, cash and short-term investments have declined. More troubling, though, is that EBITDA, a measure of profitability has fallen, causing the leverage ratio to trend up to an unsustainable level.

Hence, it is unsurprising that HanesBrands (HBI) cut the dividend and is directing FCF to reduce debt.

Lower Revenue and Earnings Per Share

Next, revenue and earnings per share (EPS) have decreased since their peak as customers cut back on clothing and shoes. In addition, gross and operating margins have fallen, indicating costs are still elevated relative to revenue. These declines, combined with rising leverage, caused the dividend quality grade to drop to a score of ‘F.’

Portfolio Insight - Total Revenues, Non-GAAP EPS HBI
Source: Portfolio Insight*

Higher Interest Rates and Expenses

Higher interest rates make debt more expensive, especially short-term and current long-term debt, which renews within twelve months. In one year, the Federal Funds rate has risen from 0.0% – 0.25% to 4.5% – 4.75%. In turn, this significant increase has caused the short-term rates to surge. Additionally, business loans or revolving credit lines are often based on the Prime Rate of 7.7%, a 4.5% gain in the past year, similar to the Federal Funds rate. Another loan index, the Secured Overnight Financing Rate (SOFR), has increased rapidly too.

Consequently, interest expense for HanesBrands is rising. The outlook is also poor because the Fed shows no sign of stopping its increases. The company’s management stated,

“We expect adjusted interest and other expense to be nearly $300 million for the full year, an increase of approximately $130 million over prior year. Our outlook assumes that we refinance approximately $1.4 billion of our 2024 maturities at current market rates in the first quarter, as well as higher average rate on our variable rate debt.”

Dividend Safety

Since HanesBrands eliminated the dividend, we do not discuss dividend safety. Moreover, we do not expect the company to reinstate the dividend for at least a few years.

Final Thoughts on HanesBrands (HBI) Dividend Cut

HanesBrands has near-term challenges not entirely of its making. Apparel companies are struggling with inflation causing higher material, labor, packaging, and freight costs. In addition, consumers are affected by higher prices and are likely to pull back on discretionary items. Clothing purchases can be delayed if consumer budgets are tight.

Investors have sold HanesBrands (HBI) stock because of the dividend cut, and expectations for growth are low in the current economic environment.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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