Photo by Wance Paleri on Unsplash
 

Newell Brands (NWL) cut its dividend because of lower demand, high leverage, and changing capital allocation strategy.

The company sells household products under well-known brand names. But a challenging business environment and inconsistent past performance have pressured Newell’s results. Hence, investors have been selling this dividend stock. The share price peaked in mid-2017 and has declined since then. A new CEO and capital allocation strategy resulted in a dividend cut.
 

Overview of Newell Brands (NWL)

Newell Brands traces its history to 1903 when it made metal curtain rods. Today, the company is a leading producer of consumer products. It also sells commercial products. The firm grew through many acquisitions, including large ones like Rubbermaid in 1999 and Jarden in 2015. The success of these acquisitions is debatable. However, the company now operates through three business segments: Home & Commercial Solutions (55% of total revenue), Learning and Development (31% of total revenue), and Outdoor and Recreation (14% of total revenue).

The firm owns dozens of recognizable brands, like Calphalon, Mr. Coffee, Oster, Sunbeam, Yankee Candle, Elmer’s, Paper Mate, Parker, Coleman, Marmot, Rubbermaid, Graco, Reynolds, Ball, etc.

Total revenue was $9,459 million in 2022 and $8,876 million in the past twelve months.

Source: Newell Brands Investor Relations
 

Dividend Cut Announcement

Newell Brands (NWL) slashed its dividend by 39.6% on May 16, 2023. The firm’s quarterly dividend was $0.23 per share before the announcement. After, the dividend was changed to $0.07 per share. In the statement, the press release said,

“Over the past several months, as previously communicated, the management team has undertaken a refresh of the corporate strategy, encompassing: a comprehensive assessment of where Newell Brands stands versus best-in-class competition on the key capabilities required to win in this industry, an updated and integrated set of where to play and how to win choices, an assessment of the talent and culture required to enact the strategy refresh, as well as an evaluation of the capital allocation priorities required to support the new strategy.”

“Management continues to expect a strong rebound in Newell Brands’ cash flow performance in 2023 and remains confident about the cash flow generation potential of the business. The company is deliberately resetting its capital allocation priorities and right-sizing the dividend to fund high-return internal supply chain consolidation investment opportunities, while enabling faster de-leveraging of the balance sheet and providing additional financial flexibility.”

“Today’s update to Newell Brands’ dividend policy is aligned with the broader strategy refresh and management’s recommended capital allocation framework, with the dividend remaining an important priority going forward. The company plans to share additional details about the strategy refresh within the next few months.”

The company had last cut its dividend in 2008 during the Great Recession. But Newell Brands (NWL) increased the dividend until 2017, after which it was held constant until the cut.
 

Challenges

Newell Brands (NWL) faces challenges such as lower demand, high debt and leverage, and poor capital allocation strategy resulting in the dividend cut.
 

Lower Demand

Despite many well-known brands, Newell’s revenue has been flat for years because it has not been able to grow. But the problem is many of the firm’s brands are discretionary purchases. Hence, they can be deferred during periods of economic duress, like starting in 2022. Inflation and higher interest rates have stressed consumers. Instead of purchasing discretionary items, they are focused on necessities. As a result, demand in three out of five segments before the reorganization fell in 2022. Sales in Home Appliances fell 12.5%, in Home Solutions, they dropped 8.6%, and in Outdoor Recreation, the decline was 3.0%.

Another concern is large retailers are investing in their own private-label brands. Newell’s brands are well recognized, but the barrier to entry is low for its market segments.
 

High Debt and Leverage

Newell has a highly leveraged balance sheet. Total debt at the end of Q1 2023 was $6,357 million, offset by only $271 million in cash. Notably, debt exceeds market capitalization. The firm’s leverage ratio has soared to nearly 6X as debt rose and EBITDA fell. Next, interest rates have climbed, causing coverage to fall to ~2.5X.

The credit rating agencies have downgraded the company to junk status. S&P Global lowered the long-term issuer credit rating to BB+ from BBB-. They stated,

“S&P believes Newell Brands (NWL) is not committed to a financial policy that supports an investment-grade rating because it prioritized shareholder returns over debt reduction. In addition, the ratings agency believes NWL cannot materially reduce its current short-term debt balance in 2023 and 2024 because of the projected $200M of discretionary cash flow generation in total over the two-year period. Adding to the burden, S&P said NWL will likely have to refinance some maturities or borrow to repay them, which will likely increase its debt levels and interest burden which could put pressure on its ability to meet its interest coverage covenant of 3.5X.”

Moreover, Fitch lowered its rating to BB with a negative outlook. These ratings are non-investment grade and speculative.
 

Poor Capital Allocation Strategy

Newell’s capital allocation was geared toward a return of capital to shareholders. The problem was that the company used debt to pay dividends and periodically repurchase shares. In the past five years, the cash required for the dividend payout sometimes exceeded free cash flow (FCF). The main issue has been the fluctuating operating cash flow caused by write-downs, restructuring, and excess inventory.

That said, the company’s new CEO is implementing a new strategy in a turnaround plan.
 

Dividend Safety

Newell’s dividend safety has been low for an extended period. The company receives a dividend safety score of ‘F.’ Furthermore, we expect the dividend safety will remain low until the restructuring is completed. In fact, the firm could again cut the dividend if operational performance does not improve.

After the cut, the forward payout ratio is about 29% based on an annual dividend rate of $0.28 and a consensus earnings estimate of $0.97 per share. This value is much less than our target of 65%.

The annual dividend now requires about $115.9 million ($0.28 yearly dividend x 414 million shares) compared to $385 million in 2022. The dividend-to-FCF ratio will probably improve in 2024. In 2023, we expect restructuring costs to impact operating cash flow.

As discussed above, Newell’s balance sheet is leveraged. The firm needs to issue debt to pay the debt. The planned restructuring should save costs, but Newell may need to sell assets to lower debt materially.

(Click on image to enlarge)

Source: Portfolio Insight*
 

Final Thoughts on Newell Brands (NWL) Dividend Cut

The dividend yield had soared to more than 10%, a level typically associated with a distressed company. Newell faced low demand, too much debt, and poor capital allocation. As a result, Newell Brands (NWL) cut the dividend because earnings and cash flow did not support maintaining it.

Looking forward, the sentiment around Newell Brands is negative, and investors are selling the stock. However, the company has a new CEO and is restructuring. But it will take a few years in an inflationary environment with high-interest rates to create positive momentum.

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