Last Updated on October 22, 2023 by Prakash Kolli
The markets are back to this year’s lows. Thus, the market has brought down a lot of stocks with it. It is down a little over (-15%) from the all-time high making it the worst start since 1939. When the market is down, I like to find support levels and create price alerts at those support levels for all the undervalued companies that I am interested in buying, like Whirlpool.
For example, Whirlpool Corporation (WHR) is one company that I brought recently because it hit a key support level between $165 and $170. In the chart below, it is marked as “1”. I am very interested in buying more shares, and the following support level will be at the $130 to $148 level. This level is marked as “2” in the chart below. However, Whirlpool is still undervalued at current levels, and the dividend yield is nearly 4%. We will discuss more details about the company and the amount of undervaluation.
Overview of Whirlpool
The Whirlpool Corporation is an American multinational manufacturer and marketer of home appliances. The company is headquartered in Benton Charter Township, Michigan, United States. The Fortune 500 company has annual revenue of approximately $21 billion, 78,000 employees, and more than 70 manufacturing and technology research centers worldwide.
The company markets its namesake flagship brand Whirlpool, alongside other brands, including Maytag, KitchenAid, JennAir, Amana, Gladiator GarageWorks, Inglis, Estate, Brastemp, Bauknecht, Hotpoint, Ignis, Indesit, and Consul.
WHR was down 29% since its all-time high in May 2021. The main driver of the stock price decrease is a reversion to the mean after the stock price went from the low in March 2020 to a high in May 2021. Rising mortgage rate and expectations of weaker home sales is also a concern. The current stock price of $185.27 (as of this writing) is right at the lower end of the 52-week range, between $164.65 and $257.68 per share. Thus, WHR looks like a stock that seems to be in the right place to buy up shares where both the 52-week range and support line meet.
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WHR Dividend History, Growth, and Yield
We will now look at WHR’s dividend history, growth, and yield. We will then determine if Whirlpool is still a good buy and undervalued at current prices.
WHR is considered a Dividend Contender, a company that has increased its dividend for more than ten years. In this case, WHR has increased its dividend for 12 consecutive years. WHR’s most recent dividend increase was 25%, announced in February 2022.
Additionally, according to Portfolio Insight*, WHR has a five-year dividend growth rate of about 6.92%, which is an excellent rate considering how fast inflation increased last year. The 10-year dividend growth rate is higher at ~10.94%.
Something essential to note is that WHR continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries were cutting or suspending their dividend payments during the COVID-19 pandemic. However, WHR continued to pay out its dividend and increased it. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.
The company has an excellent dividend yield of approximately 3.7% as of this writing, which is more than double the average dividend yield of the S&P 500 Index. This dividend yield is a respectable initial yield for income-driven investors. This dividend yield is also suitable for investors leaving the bond market looking for higher yields. Although, it may not be an excellent stock for income-driven investors who may want a 4.5% yield or higher. However, with the company’s rate of increasing its dividend, I can see over 5% yield on cost (YOC) in the next 3 to 4 years.
WHR’s current dividend yield is higher than its own 5-year average dividend yield of about 3.06%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. Stock price and dividend yield are inversely related. If the stock price goes higher, the dividend yield goes lower and vice versa.
Let’s determine if the current dividend is safe? This metric is critical to look at as a dividend growth investor. Sometimes, undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.
To determine if the dividend payments are safe every year, we must look at two critical metrics. The first one is earning per share (EPS), and then we must look into free cash flow (FCF) per share or operating cash flow (OCF).
Analysts predict that WHR will earn an EPS of about $24.50 per share for fiscal year (FY) 2022. Analysts are somewhat accurate when predicting WHR’s future EPS. In addition, the company is expected to pay out $6.48 per share in dividends for the entire year. These numbers give a payout ratio of approximately 26.3% based on EPS, a conservative value.
Having a 50% or lower dividend coverage with a dividend yield of over 3.0% gets me very excited. This point will allow the company to continue to grow its dividend at a mid-single-digit rate or a high single-digit rate, as it has been doing for the past ten years without sacrificing dividend safety. In addition, WHR has a dividend payout ratio of 32.7% on an FCF basis. Thus, the dividend is well covered in both EPS and OFC.
WHR Revenue and Earnings Growth / Balance Sheet Strength
We will now look at how well WHR performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.
WHR revenues have been growing modestly at a compound annual growth rate (CAGR) of about 1.7% for the past ten years. Net income, however, did much better with a CAGR of ~18% over the same ten-year period.
However, according to Portfolio Insight*, EPS has grown 14.73% annually for the past ten years and at a CAGR of 13.59% over the past five years. Furthermore, EPS has had a significant increase from FY2020 to FY2021, increasing nearly 44% year over year.
Since revenue, net income, and EPS did have decent growth over the years, this stock is attractive based on its valuation and dividend yield. We will talk about the company’s valuation later in this article. In the meantime, analysts predict that the company will grow EPS at a 6% rate over the next five years.
Last year’s EPS increased from $18.55 per share in 2020 to $26.66 per share for 2021, a significant increase of 44% considering the challenging two years because of the COVID-19 pandemic. This performance was an excellent growth year over year. Additionally, analysts expect WHR to make an EPS of $24.50 per share for the fiscal year 2022, which would be a ~6% decrease compared to 2021. This drop is one of the factors of the price decrease, but it is something I am not concerned with over the long term.
The company has a solid balance sheet. WHR has an S&P Global credit rating of BBB, a lower-medium investment grade. Also, the company has a debt-to-equity ratio of 1.3, which is an acceptable ratio. Thus, the company has a stable balance sheet to overcome significant economic downturns like the COVID-19 pandemic last two years, adding to the dividend safety.
WHR Competitive Advantage
WHR’s competitive advantage comes from its size and history of doing business. As a result, the company can optimize and scale much faster than most competitors. The company also could continue to make strategic acquisitions to grow its size, helping with future earnings growth. Another advantage is its brand. Consumers and investors know Whirlpool as a home appliances company.
Is Whirlpool Undervalued
One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of the future cash flow that that business can provide.
Let’s first look at the P/E ratio. WHR has a P/E ratio of ~7.8X based on FY 2022 EPS of $24.50 per share. The P/E multiple is excellent compared to the past 5-year PE average of 10.1X suggesting that Whirlpool is undervalued. If WHR were to vert back to a P/E of 10.1X, we would obtain a price of $252.50 per share.
Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 3.7%. There is good upside potential as WHR’s own 5-year dividend yield average is ~3.0%. For example, if WHR were to return to its dividend yield 5-year average, the price target would be $233.33.
The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 6%. I use a 10% discount rate because of the higher-than-normal current dividend yield. In addition, the projected dividend growth rate is conservative and lower than its past 5-year average. These assumptions give us a fair price target of approximately $319.74 per share.
If we average the three fair price targets of $252.50, $233.33, and $319.74, we obtain a reasonable, fair price of $268.52 per share, giving WHR a possible upside of 44.9% from the current $185.27 share price.
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Conclusion on Whirlpool (WHR): Undervalued and 4% Yield
Whirlpool is a high-quality and undervalued company that should meet most investors’ requirements. The company has a market-beating 3.7% yield and a long-term dividend growth history. In addition, the company grew earnings during the COVID-19 pandemic, which says a lot about its business model and quality. Whirlpool is a world-class corporation on sale with a 44.9% upside from the current price. Thus, I have a buy recommendation for it.
Disclosure: Long WHR
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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.