Clean Up With This Dividend Stock

Investors looking for higher levels of income should consider high-quality dividend payers like Whirlpool (WHR)  to their portfolios. While Whirlpool is exposed to global economic growth, the company remains highly profitable with a positive long-term growth outlook. The stock also rewards investors with a 3% dividend yield along with regular dividend increases, well above inflation. As a result, investors should not worry about the short-term headwinds.

Navigating Tough Economic Waters Since 1955

Founded in 1955, Whirlpool Corporation is a major home appliance company with well-known brands like Whirlpool, KitchenAid and Maytag. Roughly half of the company's sales are in North America, but Whirlpool does business around the world under 13 principal brand names. The $10 billion market cap company, which employees about 92,000 people, generates roughly $21 billion in annual sales.

Whirlpool released third-quarter 2019 results earlier this month that show sales came in at $5.09 billion, down 4.4% compared to the same quarter in 2018. But the true performance of the underlying business was much better than it initially appeared. Unfavorable currency fluctuations accounted for the entirety of Whirlpool's revenue decline last quarter -- and then some. Organic net sales, which exclude currency translation, actually increased 1.6% year-over-year, indicating strong underlying demand for Whirlpool's products. Growth was broad-based across multiple core geographic markets, as Whirlpool saw organic growth in North America, Latin America and Asia, partially offset by declines in Europe, the Middle East, and Africa.

Reported net earnings totaled $358 million, or $5.57 per share, compared to $210 million or $3.22 per share in the prior year period. But this includes a significant gain related to the sale of the Embraco compressor business. On an adjusted basis, ongoing earnings-per-share equaled $3.97 compared to $4.55 previously. During the quarter, Whirlpool repaid a $1 billion term loan. Whirlpool also updated its outlook for full-year 2019.

Whirlpool stepped up its debt repayment and also saw rising operating costs, which weighed on earnings in the most recent quarter. However, the company still expects 2019 to be a highly profitable year. It anticipates earnings of $16.80 to $17.55 on a generally accepted accounting principle-basis, or $14.75 to $15.50 per share on an ongoing basis, excluding one-time items. This will easily allow the company to continue rewarding shareholders with a competitive and growing dividend.

Leading Brands Fuel Steady Growth

Whirlpool has a number of category-leading brands in its product portfolio, especially the flagship Whirlpool brand, as well as KitchenAid. Whirlpool's strong brands are the result of its investment in product innovation and research and development. For example, Whirlpool has 65 manufacturing and technology research centers. This allows it to maintain a leadership position across its major brand segments, a major competitive advantage in a highly competitive industry. Whirlpool also has global scale that smaller competitors cannot match.

This has led to steady growth over the past decade. From 2007 through 2018, Whirlpool grew earnings-per-share by 6% per year on average. There were three primary drivers of earnings growth. First, total company-wide sales grew by an average compound rate of 0.7% per year during this period. Next, margin expansion accounted for several percentage points of EPS growth. An improving margin (7% to 10% operating margin expansion and 2% to almost 5% net profit margin expansion) has helped boost EPS growth. Lastly, share repurchases have added to EPS growth, as fewer shares outstanding helps reduce the denominator in the earnings-per-share calculation. Whirlpool used $100 million to repurchase its common stock over the first three quarters of the current fiscal year.

With a portfolio of leading brands and durable competitive advantages, Whirlpool has a positive long-term growth outlook. Company management has stated its long-term goal of 3% to 5% organic net sales growth, although organic growth could come in slightly below this target range this year, given the macroeconomic uncertainties mentioned above. Taken collectively -- the potential for some margin improvement and a strong share repurchase program over the intermediate-term against a potential down year for 2019 and a history of growing by 5% to 6% annually -- investors can reasonably expect mid-single-digit EPS growth over the next several years.

This level of earnings growth will easily allow the company to continue returning cash to shareholders through buybacks and dividends.

Shareholder-Friendly Dividend Stock

Whirlpool currently pays a quarterly dividend of $1.20 per share, or $4.80 annualized. The current dividend yield is approximately 3%, which beats the average yield of the S&P 500 Index by a full percentage point. Whirlpool's 3% dividend yield is even more attractive now that the Federal Reserve has once again cut interest rates. Income investors starved for yield should consider high-quality 3% dividend stocks such as Whirlpool.

And, Whirlpool has the potential to grow its dividend over time, meaning investors will see their income rise from this stock. Whirlpool has increased its dividend for seven consecutive years, including a 4% hike in April. Another dividend raise is likely next year, even in a challenging global economic environment. Based on projected 2019 adjusted earnings-per-share of $14.75 to $15.50, Whirlpool's current annualized dividend amounts to a 2019 payout ratio of 31%-33%.

This is a low payout ratio that leaves plenty of room for future dividend increases, even if earnings-per-share were to remain flat for several years. But if the global economy continues to expand at a moderate pace, Whirlpool's earnings are likely to grow in the years ahead. As a result, investors can reasonably expect mid-single-digit dividend increases each year.

In times like these, high-dividend stocks such as Whirlpool are extremely valuable for income investors. This is particularly true when interest rates are on the decline -- the U.S. Federal Reserve made another cut in the Fed Funds rate on Oct. 30, a key benchmark for broader interest rates. Also, as the U.S. economy continues to expand at a steady pace, including 1.9% gross domestic product growth in the third quarter, concerns are growing of slowing global growth. The trade wars with major trading partners such as China remains a lingering issue, too.

But Whirlpool has proven to be a solid business, and we continue to be enthused by the moderate growth prospects coupled with a well-covered and above-average dividend and robust share repurchase program. The combination of earnings growth and dividends could easily provide for high-single digit total returns to shareholders over the next several years, barring a major recession or global economic downturn.

At the time of publication, Ciura had no position in the securities mentioned.