Whirlpool Corporation’s Cash Flow Increases The Safety Of Its Dividend Yield

Recap from October’s Picks

On a price return basis, the Safest Dividend Yields Model Portfolio (14.8%) outperformed the S&P 500 (+8.4%) by 6.4% from October 20, 2022 through November 18, 2022. On a total return basis, the Model Portfolio (+15.2%) outperformed the S&P 500 (+8.4%) by 6.8% over the same time. The best performing large-cap stock was up 22%, and the best performing small-cap stock was up 59%. Overall, 12 out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from October 20, 2022 through November 18, 2022.

This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow (FCF) provide higher quality and safer dividend yields because strong FCF is proof they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Featured Stock for November: Whirlpool Corporation
WHR

Whirlpool Corporation (WHR) is the featured stock in November’s Safest Dividend Yields Model Portfolio.

Though Whirlpool’s profits have fallen from 2021’s all-time high, TTM NOPAT remains well above historical levels. Longer term, the company has grown revenue by 1% compounded annually and net operating profit after tax (NOPAT) by 6% compounded annually since 2011. Whirlpool’s NOPAT margin has risen from 3% in 2011 to 6% over the trailing twelve months (TTM), while return on invested capital (ROIC) has risen from 6% to 9% over the same time.

Figure 1: Whirlpool’s Revenue & NOPAT Since 2011

Free Cash Flow Supports Regular Dividend Payments

Whirlpool has increased its regular dividend from $4.30/share in 2017 to $5.45/share in 2021. The current quarterly dividend provides a 4.8% annualized dividend yield.

More importantly, Whirlpool’s free cash flow (FCF) easily exceeds its regular dividend payments. From 2017 to 2021, Whirlpool generated $7.9 billion (59% of current enterprise value) in FCF while paying $1.6 billion in dividends. Over the TTM, Whirlpool has generated $1.0 billion in FCF and paid out $380 million in dividends. See Figure 2.

Figure 2: Whirlpool’s FCF vs. Regular Dividends Since 2017

As Figure 2 shows, Whirlpool’s dividends are backed by a history of reliable cash flows. Dividends from companies with low or negative FCF are less dependable since the company may not be able to sustain paying dividends.

WHR Is Undervalued

At its current price of $146/share, Whirlpool has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects Whirlpool’s NOPAT to permanently decline by 40%. This expectation seems overly pessimistic given that Whirlpool has grown NOPAT by 6% compounded annually since 2011 and 5% compounded annually since 2001.

Even if Whirlpool’s NOPAT margin falls to 5% (below its TTM NOPAT margin of 6%) and revenue falls by 1% compounded annually over the next decade, the stock would be worth $200+/share today – a 34% upside. See the math behind this reverse DCF scenario. In this scenario, Whirlpool’s NOPAT would fall by 5% compounded annually through 2031. Should the company’s NOPAT grow in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Whirlpool’s 10-Ks and 10-Qs:

Income Statement: I made $929 million in adjustments with a net effect of removing $39 million in non-operating income (<1% of revenue).

Balance Sheet: I made $8.8 billion in adjustments to calculate invested capital with a net increase of $1.1 billion. The most notable adjustment was $2.4 billion (20% of reported net assets) in other comprehensive income.

Valuation: I made $6.9 billion in adjustments with a net effect of decreasing shareholder value by $5.4 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $763 million in excess cash. This adjustment represents 10% of Whirlpool’s market value.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.