Whirlpool: Dividend Is Tempting But It’s Still Too Early (WHR)

Whirlpool (NYSE:WHR) is a manufacturer of home appliances that often comes up in dividend growth screens. Over the past year, the stock has fallen to a relatively low valuation. In turn, the dividend yield has increased with the falling price to the point that I decided to take a closer look. Below is my review.

Whirlpool Dividend History

The first thing I always like to look at is a company’s dividend growth history. Whirlpool is a dividend contender with twelve years of dividend growth. Its 10-year growth rate is 13%, and its 5-year growth rate is lower at 10%. While a falling growth rate isn’t uncommon, it’s worth considering when evaluating future dividend growth prospects. In this case, the most recent increase of 25% is a positive and considerably boosted the 5 and 10-year rates.

As Whirlpool is an old company founded in 1911, I like to investigate its dividend history before beginning its current dividend growth streak. This is particularly true for dividend growth streaks that started soon after the Great Recession, as I want to know how the dividend did during that time.

The company website shows distributions paid back to 1989, matching the Seeking Alpha information. The chart below shows the dividends paid since 1990.

The dividend history shown in the chart has some positives. While the company sometimes froze the dividend for extended periods, there has never been a cut. However, before the current growth streak, the dividend was extremely slow growing. The slow dividend growth can be explained by the earnings chart below.

From 1990 through the beginning of the current dividend growth streak, earnings were slow growing. The company did an excellent job of matching the dividend to earnings. Over the last 12 years, earnings have grown at a faster clip allowing faster dividend growth.

A positive sign for dividend sustainability is when companies match dividend growth with earnings. Of course, this also means that dividend growth will likely align with future earnings. Right now, analysts project -28% earnings growth in 2023 and -2% to -7% average EPS growth over the next five years. These are not enticing numbers for dividend growth, especially considering that the full downside may not be built into the estimates should a recession occur.

Given Whirlpool’s dividend history, it doesn’t look like a cut is probable. However, I see a large potential for a freeze upcoming. Of course, the company could elect to continue growing the dividend by expanding the payout ratio.

Whirlpool Payout Ratio

I am impressed with the consistency of Whirlpool’s payout ratio over the past 20 years; especially during its current dividend streak of rapid dividend growth. Many companies fall into the trap of expanding the payout ratio to increase the dividend. This is an unsustainable practice and one of the first things I check.

Whirlpool has typically had earnings payout ratios between 25 and 30%. The ratio is set to jump to over 40% in the coming years, just maintaining the current dividend. While this is still a manageable number, it is a break from historical. The company could certainly manage a tiny increase here, but a freeze would be more prudent.

The cash payout ratios on both operating cash flow and free cash flow are in a similar situation. During 2022, the company paid out about 25% of its operating cash flow and 41% of free cash. Both are looking to do better than the earnings payout ratio going forward. If the projections are correct, this indicates that the company may continue its dividend growth even in a poor economy.

Valuation on Yield

Today, Whirlpool is yielding a fat 4.7%. Besides the Flash Crash and briefly in 2022, this is the highest yield in the past ten years. Additionally, the yield is significantly higher than the average over this time frame. The table below shows the past ten years’ min, max, and average yields.

Expanding the dividend yield history to 1990 shows that the yield has only exceeded 5% a handful of times, the 1991 recession, the 2008 recession, the pandemic, and the last year. Additionally, it shows that the average yield on WHR is around 2.5% over this period.

Based on yield alone, it appears that today is a good time to add Whirlpool. It should be noted that yield peaked significantly higher than 5% in past recessionary eras, reaching 6% in 1990, 8% in 2008, and 7.5% in 2020. If you believe we are entering a recession, there will likely be better opportunities to enter a position. The stock would need to fall to $100 to reach dividend yields close to the Pandemic or Great Recession lows.

Valuation on PE

The current PE of Whirlpool stands at 7.81X. As with dividend yield, this indicates the company may be a bargain based on historicals. This is shown in the Fastgraph below. The 20-year average PE as shown, is 11.3, which is considerably higher than today’s 7.81X.

During the Great Recession and 2020, Whirlpool hit PE ratios of well under 5. Today the price would need to fall below $100 to reach that level. Of course, this is before taking into account any further reduced earnings.

Other Factors and Risks

There are several negatives right now for Whirlpool. They are currently seeing declining demand worldwide. Earnings forecasts are crashing, and the outlook isn’t pretty. Much of the world appears headed for a recession, if not already in one. Small caps like WHR tend to get beaten up excessively in times like these, but the company has always bounced back in relative short order and likely will again.

Housing demand is the second big concern. Every new unit built needs appliances. These add to the base of appliances that need replacing every decade or so. A slowdown in construction coupled with consumers delaying purchases only hurts Whirlpool.

The flip side of the housing demand argument is that people will stay in their existing homes and opt to improve what they already have. Appliances don’t last forever. However, this has not been shown to boost earnings historically during downturns. It’s more of a way of knowing that earnings will eventually recover.

Conclusion

Much of the negativity appears priced into WHR currently. While the current valuation has room to fall to reach previous recessionary levels, the dividend yield is significantly better than its historical average. The stock has always recovered within a couple of years to close to historical averages, indicating that a purchase today might leave some on the table but could have an outsized gain when the company recovers.

From the dividend view, the story is more compelling. Buying at nearly a 5% yield is almost double the company’s average. An investor buying at the average yield of 2.5% and meeting the 5-yr dividend growth rate of close to 10% would take seven years of holding to achieve a 5% yield-on-cost. An investor buying today would be ahead even if the company freezes the distribution for the next seven years – and it is unlikely that the company will take that long to see growth again.

Whirlpool will remain a profitable company with strong cash flow. The dividend is well covered both in earnings and cash. The company has always recovered in short order from recessions; however, a dividend freeze or near freeze is likely over the next few years. As a dividend growth investor, dividend growth is my biggest priority. For this reason, I would consider entering a high-yield position in WHR at a 7% yield and rate it a Hold currently.