A large dividend yield can be a sign of opportunity for an income investor, or a sign that a dividend cut is on the horizon. Telling the difference between the two situations often boils down to two things: the company's financial performance and its commitment to sustaining the dividend payment.
Consider consumer products maker Newell Brands (NWL -1.42%), which has a huge 8.8% dividend yield. Yet, as the company works to turn its business back in a positive direction, there are uncertainties. Let's see what this could all mean for investors.
A tough quarter
Newell's top line fell 24% year over year in the first quarter of 2023. That includes a divestiture, so the numbers aren't quite as bad as they may seem. However, with core sales down 18% from a year ago, it is hard to suggest that the owner of iconic brands like Rubbermaid, Coleman, and Sharpie is firing on all cylinders right now.
The caveat is that Newell is lapping some strong numbers, and its first-quarter sales were above where they were in 2019, prior to the coronavirus pandemic. But that doesn't really make up for the fact that the company's normalized earnings, which take out one-time items, fell into the red in the quarter, with a loss of $0.06 per share versus a profit of $0.35 a year ago. The company also missed Wall Street analyst earnings estimates.
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Inflation is a big reason for the shortfall, with the gross margin falling from 31% in the first quarter of 2022 to just 26.7% in the first quarter of 2023. Management is still working on price increases to offset its rising costs, with more scheduled as the year progresses. Success in this effort is likely to be important for the company and its shareholders.
The company maintained its guidance for full-year revenue of between $8.4 billion and $8.6 billion with normalized earnings expected to be between $0.95 per share and $1.08. But it said that results will likely fall toward the low end of the range. If it can't get the pricing it wants or volumes decline more than expected in the face of higher prices, the low end could be tough to achieve. And the background for all of this is that the company is working on several restructuring initiatives, including rationalizing its product lineup.
There is a lot going on here. Given the first-quarter results and guidance, and the fact that so much is riding on a business pickup in the second half of the year, investors should probably be cautious about Newell's shares today.
And the dividend?
The payout ratio is a go-to metric that dividend investors use to assess the safety of a dividend. Newell wasn't profitable in the first quarter, so earnings clearly didn't cover the dividend. Stepping back to look at the full year, with a dividend run rate of $0.92 per share per year, the low end of Newell's guidance doesn't provide much comfort, as the payout ratio would be around 97%. There's not much room for further adversity there.
To be fair, dividends are paid out of cash flow, and companies can sustain dividends through difficult periods even if their earnings don't cover the payment. In reality, the dividend is decided by the board and a policy can be changed at any time. But a CEO plays a material role in setting dividend policy in most companies and vocal management support can be an important indicator.
That's a problem at Newell. When asked during the first-quarter 2023 earnings conference call about the sustainability of the dividend, management's response was less than inspiring. With a new CEO set to take over, the company is planning to reassess its capital allocation priorities. It isn't uncommon for a new CEO to wipe the slate clean, if you will, with a dividend reset.
Given the apparent lack of support for the dividend and the expectation of bottom-of-the-range full-year performance, dividend investors should probably be treading with extreme caution as a dividend cut would not be at all surprising.
Not the best near-term prospects
Newell is highly likely to eventually solve the problems it is facing, even if the process isn't pretty. This year is not shaping up to be a strong one and a recession, which many people expect later in the year, would make life even more difficult for the company.
With Newell examining its capital allocation choices amid a turnaround, it seems like that high yield on offer might not be worth the risk right now. Investors should probably hold off on this stock until there's tangible signs of sustained improvement.
