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After the First Report Card of 2020, Spectrum Brands' Dividend Gets a Pass for Now

By Nicholas Rossolillo - Feb 4, 2020 at 6:08AM

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After reshuffling the business last year, 2020 is off to an unimpressive start.

Diversified consumer goods manufacturer Spectrum Brands (SPB 1.96%) had a great 2019. Rallying from a multi-year slump and business overhaul (Rayovac, Armor All, and the STP motor oil businesses were sold to Energizer Holdings), the stock surged 52% higher last year.  

Shares have taken a breather to start 2020, though, down 5% in the month of January, and the stock is unlikely to repeat its recent performance in the new year. Spectrum's consumer products are stuck in a rut, and a 2.8% dividend yield isn't enough to warrant an investment at this point.  

A couple moving boxes into a kitchen.

Image source: Getty Images.

The start to a new fiscal year

Spectrum reported flattish sales results to kick off its 2020 fiscal year. Organic growth (which excludes acquisitions and divestitures) fell 0.3% year over year, driven by a 2.4% decline in the hardware and home improvement segment and a 13.9% decline in home and garden. These losses were partially offset by a 1.5% and 0.5% gain in the home and personal care and global pet care segments, respectively. All told, revenue declined 1%. Adjusted earnings, as measured by Spectrum's preferred earnings before interest, tax, depreciation, and amortization (EBITDA) metric, fell 11% from a year ago.

Declines were driven by higher tariffs on goods manufactured out of the country, and restructuring charges on businesses sold (including the sale of Spectrum's pet food business in Europe during the quarter) also weighed on results. However, the good news was that adjusted earnings from continuing operations only fell 5% thanks to the accelerated share repurchase program that was put in place late last year. The company reported that it scooped up $81.4 million of its stock during the first quarter alone, providing a back-stop against what otherwise would have been a pretty ugly bottom-line read.  

Metric

Q1 2020

Q1 2019

Change

Revenue

$872 million

$880 million

(1%)

Cost of sales

$593 million

$574 million

3%

Operating expenses

$315 million

$281 million

12%

Net income (loss)

($36 million)

($113 million)

N/A

Adjusted EBITDA

$102 million

$115 million

(11%)

Adjusted EPS from continuing operations

$0.20

$0.21

(4%)

Data source: Spectrum Brands.  

After posting flat sales and an 18% decline in adjusted EBITDA in fiscal 2019, another drop in results isn't exactly a good sign. However, first-quarter numbers were actually in line with management's forecast. Timing in purchases from its customers accounted for the drops in the home improvement and home and garden segments, and Spectrum expects business will rebound later in the year.  

Steer clear for now

Specifically, management reiterated its view that sales will finish 2020 up by a low single-digit percentage and that adjusted EBITDA will be $570 million to $590 million (up 2% from 2019 at the midpoint of guidance). Granted, the outlook isn't anything to get too excited over, but this could be viewed as one cheap stock. Spectrum Brands trades for 4.8 times expected adjusted EBITDA, and 11.1 times expected 2020 adjusted free cash flow (what's left after operating and capital expenses are paid) of $240 million to $260 million. As for free cash flow, the forecast is much better than the negative free cash flow run rate from 2019.

However, for the time being, there are greener pastures elsewhere in the consumer goods investment space. This is a slow-growing business, and a lot is riding on Spectrum's ability to cut costs. So far, it's still digging itself out of the hole, and it remains to be seen whether sales will reverse their slide. Along the way, a 2.8% dividend yield doesn't offer enough of a cushion should future results disappoint. Thus, though it looks cheap as it continues its post-restructuring plan, I'm steering clear for now.

Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Spectrum Brands. The Motley Fool has a disclosure policy.

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