Dividend paying stocks like Hanesbrands Inc. (NYSE:HBI) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
With a seven-year payment history and a 4.2% yield, many investors probably find Hanesbrands intriguing. We’d agree the yield does look enticing. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Looking at the data, we can see that 38% of Hanesbrands’s profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, Hanesbrands paid out 34% as dividends, suggesting the dividend is affordable. It’s positive to see that Hanesbrands’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Is Hanesbrands’s Balance Sheet Risky?
As Hanesbrands has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Hanesbrands has net debt of 3.25 times its EBITDA, which is getting towards the limit of most investors’ comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Net interest cover of 5.09 times its interest expense appears reasonable for Hanesbrands, although we’re conscious that even high interest cover doesn’t make a company bulletproof.
Consider getting our latest analysis on Hanesbrands’s financial position here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Hanesbrands has been paying a dividend for the past seven years. The company has been paying a stable dividend for a while now, which is great. However we’d prefer to see consistency for a few more years before giving it our full seal of approval. During the past seven-year period, the first annual payment was US$0.20 in 2012, compared to US$0.60 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Hanesbrands has grown its earnings per share at 14% per annum over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.
To summarise, shareholders should always check that Hanesbrands’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Hanesbrands has low and conservative payout ratios. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. All things considered, Hanesbrands looks like a strong prospect. At the right valuation, it could be something special.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 11 analysts we track are forecasting for Hanesbrands for free with public analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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