If there's one thing investors can take away from Newell Brands' (NWL 12.25%) 2022 business performance, it's that the second half of the year was awful. Unfortunately, the maker of such well-known brands as Rubbermaid and Sunbeam is projecting that the hard times will continue into 2023 -- which helps explain why the stock has fallen around 50% from its 52-week highs. Is this a chance to buy or should investors tread with caution?
A terrible year
Surprisingly, 2022 started out fairly well for Newell. Core sales rose 4% in the first half with operating margin expanding 40 basis points. And then, in the second half, sales plunged 10.1% with operating margin contracting 370 basis points. Those numbers are like night and day, and almost shocking to see. For the full year, the company's GAAP earnings tallied up to $0.47 per share versus $1.45 in 2021.
Image source: Getty Images.
The worse news is that Newell expects 2023 to be better than the back half of 2022, but not particularly good. The current projection is for core sales to fall 6% to 8% with operating margin flat to down 50 basis points. In other words, there's still some more pain to come. That's highlighted by the earnings guidance, which calls for earnings per share to fall to between $0.95 and $1.08 per share.
For dividend investors looking at the company's fat 7.5% dividend yield, there's another reason to worry. In 2022, the cash dividend summed up to $0.92 per share for the year, well above the $0.47 per share the company earned, leading to an over 100% payout ratio. Assuming the company hits at least the low end of its guidance, dividend coverage will remain quite tight in 2023 as well. Dividends are paid out of cash flow, so a company can sustain a high payout ratio for a while, but this is still an issue that needs to be monitored.
NWL Times Interest Earned (TTM) data by YCharts
Adding to the concern on the dividend front is the company's material leverage. At the end of 2022, the debt-to-equity ratio stood at roughly 1.5 times, which is the high side of Newell's historical leverage range. More notably, the company's interest expenses rose rapidly in 2022, causing interest coverage to drop to a less than comforting 1.7 times from nearly 5 times at the start of the year. One of the quickest ways to free up cash (for things like rising interest costs) is to cut the dividend.
Aware of the problem
Management isn't sticking its head in the sand. It's working on streamlining the business, which has actually been a long-term goal. For example, the number of products the company sells has been reduced by an astonishing 70% since 2018 and is expected to shrink a bit further in 2023. This has helped the company do more with less, given that the average revenue per product has roughly tripled since 2018.
But that's just one thing the company is doing. It has also announced plans to restructure the business, going from five divisions down to three. The company's big restructuring effort is being called Project Phoenix, which it expects to be largely completed by the end of 2023.
Some of the big-picture actions involved will be reducing the "office" workforce by 13%, streamlining the company's real estate, centralizing its supply chain operations, transitioning to a more uniform "go-to-market model" in important international markets, and to "otherwise reduce overhead costs."
That's all good stuff, with the goal of reducing costs by between $220 million and $250 million. That said, only around $140 million to $160 million of those savings are expected to show up in 2023. The savings in 2023, meanwhile, will be offset by expected Project Phoenix costs of around $130 million. In other words, this is more of a 2024 benefit than a 2023 benefit, and even that depends on the company's ability to execute on its plans.
Worth the risk?
Newell Brands owns some extremely attractive brands, so there's a material reason to expect that it will muddle through the rough patch it is facing in one piece. That said, 2023 looks like it is going to be an important transition year for the company as it looks to get back on track after a pretty disastrous second half in 2022.
Conservative dividend investors will probably want to watch for concrete signs of improvement, which may not show up until the second or third quarter of 2023, before taking a risk on this high-yield stock. Notably, given its consumer focus, an economic downturn (which management is expecting) would make the company's life materially more difficult.
