Amid Turnaround, This Dividend Stock Is Proving to Be Elastic

Investing in turnarounds is risky, but also offers the potential for outsized returns. Companies that have hit a temporary rough patch are struggling in the near-term, but also present the opportunity to significantly outperform the S&P 500 Index, if their turnarounds are successful. One stock we believe is on the road to a successful turnaround is Hanesbrands . Hanesbrands is feeling the pain of an acquisition spree that left the company with high debt levels. But thanks to its strong cash flow, it is steadily paying down debt. At the same time, the stock rewards shareholders with a high dividend yield of nearly 4%. As a result, Hanesbrands is a high-yield stock with significant upside potential. On Track to Grow Again Hanesbrands is a leading marketer of everyday basic apparel -- underwear, activewear and other clothing. It has a market capitalization of $5.8 billion and sells its products under well-known brands, including Hanes and Champion, in America, Europe, Australia and the Asia-Pacific regions. Hanesbrands spent $2.9 billion on acquisitions in the last seven years, but has dramatically underperformed the S&P 500 in the last five years, losing 42%, while the index rallied 51%. The company is striving to assimilate its past acquisitions, while it is facing increasing competition in intimate apparel and a secular shift towards online sales. The high debt load from past acquisitions burdens the company via high interest expenses. Recent earnings reports are showing that the turnaround remains intact. Hanesbrands reported financial results for the third quarter of fiscal 2019 on Oct. 31, in which it grew its sales 1% and its constant-currency sales 2%, thanks to double-digit growth in activewear and innerwear, 4% international growth, and rapid global expansion of Champion. The gross margin of 38.7% was lower than analysts' consensus, but adjusted earnings-per-share rose 4% and met analysts' expectations thanks to reduced interest expense. Along with providing third-quarter earnings, management also boosted the low end of its full-year guidance. The company slightly improved its earnings-per-share guidance for this year, from $1.72-$1.80 previously to $1.74-$1.80, indicating that the turnaround continues to gain momentum. Turnaround Drivers Remain Intact Hanesbrands achieved positive earnings per share growth in the third quarter, and could continue to increase earnings moving forward. Fundamentally, the core drivers of the company's turnaround remain intact. These include expanding sales in new channels and geographic markets, and paying down debt. First, Hanesbrands is accelerating its sales growth in the international markets, primarily emerging markets such as China and Latin America. While U.S. sales are slowing down, these international markets continue to propel the company's sales growth. Last quarter, international sales growth of 11% in constant currency fared very well in comparison with the U.S., as the company saw international growth in both activewear and innerwear. At the same time, Hanesbrands is expanding into new channels, such as direct-to-consumer. The strongest growth catalyst for Hanesbrands is e-commerce. As consumers are increasingly shopping online, there is a huge opportunity for apparel manufacturers to sell their goods directly to consumers, and cut out the retailer middleman. Last quarter, global consumer-directed sales increased 13%, up double-digits, both domestically and internationally. The company is also seeing strong growth in its core Champion brand, which grew sales by more than 50% outside the mass channel last quarter. Next, Hanesbrands is aggressively paying down debt to improve its balance sheet and reduce its interest expense. Due to its multi-year acquisition spree, Hanesbrands has leveraged its balance sheet in recent years, with its debt to assets ratio rising from 69.9% in 2013 to 85.6% today. The result is that the debt has become a burden, by taking up too much cash flow to service the interest expense. For example, the company's interest expense currently consumes a quarter of its operating income. This has prevented the company from investing further in growth, or raising its dividend. Hanesbrands has paid the same dividend for 12 consecutive quarters. Fortunately, management is in the process of reducing the debt load. The company has reduced its net debt by $470 million and its leverage (net debt/earnings before interest, taxes, depreciation and amortization) ratio from 3.7-times to 3.3-times in the last 12 months. Because of these efforts, Hanesbrands remains on track to reduce its leverage to 2.9-times by the end of the year. This is a much more manageable level of debt, that will free up cash flow every year with lower interest expense. Hanesbrands: An Attractive Value and Income Stock Hanesbrands shares have significantly underperformed the broader market index in the past five years. But the stock is now cheap on a relative basis, with the potential for outperformance moving forward. Hanesbrands stock currently trades for 9-times this year's earnings per share, or EPS, estimate, at the midpoint of the company's guidance range. This is a low valuation for a company with strong brands and positive EPS growth. This is also much lower than its 10-year average price-to-earnings ratio of 12.9. In addition, Hanesbrands' languishing share price has elevated its dividend yield to 3.9%. The stock provides double the average dividend yield of the S&P 500 Index. The company could also return to dividend increases in the near future as its turnaround gains traction. With a lower debt level, the company has additional cash flow that can be used for dividend increases. Plus, Hanesbrands has a low payout ratio. The company expects to distribute just 34% of its adjusted earnings-per-share for 2019. Such a low payout ratio easily justifies future dividend increases once the company's deleveraging efforts are complete.

Amid Turnaround, This Dividend Stock Is Proving to Be Elastic

Hanesbrands offers a high dividend yield of nearly 4% and appears on a path to expand following a series of big acquisitions and disappointing performance.

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